For the past 12 years, the Blue Company has produced the small electric motors that fit into its main product line of dental drilling equipment. As material costs have steadily increased, the controller of the company is reviewing the decision to continue to make the small motors and has identified the following facts:
(1) The equipment used to manufacture the electric motors has a net book value (NBV) of $150,000.
(2) The space now occupied by the electric motor manufacturing department could be used to eliminate the need for storage space now being rented by the company.
(3) Comparable units can be purchased from an outside supplier for $59.75.
(4) Four of those who work in the electric motor manufacturing department would be terminated and given eight weeks' severance pay.
(5) A $10,000 unsecured note payable is still outstanding on the equipment used in the manufacturing process.
Which of the items above are relevant to the controller's decision analysis (i.e., to make vs. buy the motors)?

Question

For the past 12 years, the Blue Company has produced the small electric motors that fit into its main product line of dental drilling equipment. As material costs have steadily increased, the controller of the company is reviewing the decision to continue to make the small motors and has identified the following facts:
(1) The equipment used to manufacture the electric motors has a net book value (NBV) of $150,000. 
(2) The space now occupied by the electric motor manufacturing department could be used to eliminate the need for storage space now being rented by the company. 
(3) Comparable units can be purchased from an outside supplier for $59.75. 
(4) Four of those who work in the electric motor manufacturing department would be terminated and given eight weeks' severance pay. 
(5) A $10,000 unsecured note payable is still outstanding on the equipment used in the manufacturing process. 
Which of the items above are relevant to the controller's decision analysis (i.e., to make vs. buy the motors)?

Quizplus · Accepted Answer

1) The NBV of the equipment is not relevant as it is a sunk cost and will not affect the decision.
2) This is relevant as it represents an opportunity cost of using the space for other purposes.
3) This is relevant as it represents the cost of purchasing the motors from an outside supplier.
4) This is relevant as it represents the cost of terminating some employees.
5) This is relevant as it represents an outstanding debt that needs to be considered. Therefore, options 2, 3 and 4 are the relevant factors to be considered in the analysis. Option B is the best choice as it includes all three relevant factors.

For the Past 12 Years, the Blue Company Has Produced