DCR Company (DCR) currently makes a component part and requires 30,000 units for the coming year's production.

An external supplier has offered to make and deliver the part to DCR at a price of $3 per unit for the coming year.

It would cost DCR $3,000 to check all the units from the external supplier for defects.

Variable and fixed costs per unit to produce the 30,000 units of the component internally are $2.35 (variable cost per unit) and $1 (fixed cost per unit).

If the component was purchased from the external supplier, the only fixed cost that would be reduced is the (fixed) cost of leasing equipment for a year amounting to $6,000.

In addition , the space vacated by the equipment (which will be returned) can be rented out for a year to earn DCR $4,000.

Which of the following statements with regard to the quantitative analysis of DCR's decision on the above component part for the coming year is/are likely to be true?

1. The difference between the relevant cost of making the 30,000 units internally and purchasing them from the external supplier is $9,500

2. The difference between the relevant cost of making the 30,000 units internally and purchasing them from the external supplier is $20,500

3. The difference between the relevant cost of making the 30,000 units internally and purchasing them from the external supplier is $12,500

4. The company should purchase the 30,000 units from the external supplier instead of making it internally

Answers:

a) None of the other options are likely to be true b) Statement 1 only c) Statement 2 only d) Statements 3 and 4 e) Statement 3 only