What is a relevant cost? Relevant costs always determine which alternative should be chosen. Do you agree or dis-agree? Explain. why depreciation on an existing asset is always irrelevant.

(2) ABC limited has prepared the following cost estimates for the manufacture of a sub-assembly component based on an annual production of 8,000 units:

Per Unit Total

$ $

Direct materials 5 40,000

Direct labor 4 32,000

Variable factory overhead applied 4 32,000

Fixed factory overhead applied

(150% of direct labor cost) 6 48,000

Total cost 19 152,000

A supplier has offered to provide the subassembly at a price of $16 each. Two-thirds of fixed factory overhead, which represents executive salaries, rent, depreciation, and taxes, continue regardless of the decision. Should the company buy or make the product? Assume that the productive capacity will be idle if not used to produce the subassembly.

(3) Make-or-buy decision must be investigated, along with the broader perspective of considering how best to utilize available facilities. Explain two perspectives to consider when making the decision to make or buy a product.