Bella Corporation produces a varied line of high-quality cabinets widely used by custom builders and kitchen designers. Bella currently produces all of the hardware used in the cabinets including hinges, drawer mechanisms, etc. The company has been approached by an outside vendor, which has offered to sell these items to Bella. If the vendor's proposal is accepted, the machinery currently used to produce the hardware will be of no further use and will be sold. The company controller is studying the vendor's proposal and has assembled data on the costs listed below. Which of the costs listed is relevant to the make-or-buy decision?
A) The original cost of the equipment currently used to make the hardware.
B) The salary of the president of Bella.
C) The depreciation on the equipment currently used to make the hardware (ignore tax effects).
D) The market value of the equipment currently used to make the hardware.

Question

Quizplus · Accepted Answer

The market value of the equipment currently used to make the hardware is relevant because it represents a potential cash inflow if the equipment is sold. This is a cost that would be avoided if the company decides to buy the hardware instead of making it. The other options are sunk costs or fixed costs not directly affected by the decision.

Bella Corporation Produces a Varied Line of High-Quality Cabinets Widely