ACCA Applied Skills · Performance Management · Relevant cost analysis
Orla Co makes 5,000 units of a component at a variable cost of $12 each. Machine capacity used for the component could instead be used to make another product earning a contribution of $9,000 in total. A supplier offers the component at $15 per unit. What is the net benefit or cost of buying and using the capacity for the other product?
Buying results in a net cost of $6,000: the extra purchase cost of $15,000 outweighs the $9,000 contribution earned from the released capacity. Orla should therefore not buy.
- A$6,000 benefitCorrect
- B$9,000 benefit
- C$15,000 cost
- D$6,000 cost
Explanation
Extra cost of buying = 5,000 x ($15 - $12) = $15,000. Contribution gained from the freed capacity = $9,000. Net effect is $9,000 - $15,000 = $6,000 cost, so the correct option is a $6,000 cost...
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