THE FOLLOWING QUESTIONS ARE BASED ON THE INFORMATION BELOW.
Reliance Aircraft Corporation currently manufactures a complex hydraulic valve that controls rudder movement in its popular 707 jet aircraft. The unit cost to produce the valve is:
Reliance has an offer from Kennametal Company to supply all 200 of the valves Reliance requires annually for $4,000 per unit. If Reliance accepts the offer and ceases production of the valve, production workers and supervisors will be reassigned to other areas of 707 production. The equipment cannot be used elsewhere and has no market value. The factory floor space devoted to the production of the valves, however, can be used by another division of the company that currently leases space elsewhere at an annual cost of $85,000. Which of the following costs is avoidable if Reliance accepts Kennametal's offer?
-The depreciation of the equipment is a sunk cost that is irrelevant to the make-or-buy decision.

Question

THE FOLLOWING QUESTIONS ARE BASED ON THE INFORMATION BELOW.
Reliance Aircraft Corporation currently manufactures a complex hydraulic valve that controls rudder movement in its popular 707 jet aircraft. The unit cost to produce the valve is:
  Reliance has an offer from Kennametal Company to supply all 200 of the valves Reliance requires annually for $4,000 per unit. If Reliance accepts the offer and ceases production of the valve, production workers and supervisors will be reassigned to other areas of 707 production. The equipment cannot be used elsewhere and has no market value. The factory floor space devoted to the production of the valves, however, can be used by another division of the company that currently leases space elsewhere at an annual cost of $85,000. Which of the following costs is avoidable if Reliance accepts Kennametal's offer?
-The depreciation of the equipment is a sunk cost that is irrelevant to the make-or-buy decision.

Quizplus · Accepted Answer

Depreciation is a sunk cost because it represents a past expenditure that cannot be recovered or changed, and therefore, it should not influence future decisions such as whether to make or buy a product.