Song,a division of Carolina Enterprises,currently makes 100,000 units of a product that has created a number of manufacturing problems.Song's costs follow.
If Song were to discontinue production,fixed manufacturing costs would be reduced by 70%.The relevant cost of deciding whether the division should purchase the product from an outside supplier is:

Question

Song,a division of Carolina Enterprises,currently makes 100,000 units of a product that has created a number of manufacturing problems.Song's costs follow. 
If Song were to discontinue production,fixed manufacturing costs would be reduced by 70%.The relevant cost of deciding whether the division should purchase the product from an outside supplier is:

Quizplus · Accepted Answer

The relevant cost of deciding whether to purchase from an outside supplier is the cost of the production that will be saved if production is discontinued, plus the cost of purchasing from the outside supplier. In this case, if Song were to discontinue production, fixed manufacturing costs would be reduced by 70%, which is $1,260,000 * 70% = $882,000. If Song purchases from the outside supplier, variable costs will still have to be paid, which is $6 per unit. Assuming the same level of production at 100,000 units, the variable cost would be $6 * 100,000 = $600,000. Thus, the relevant cost is $882,000 + $600,000 = $1,482,000. However, if Song continues to produce the product, the total cost would be $1,800,000. Therefore, Song should discontinue production and purchase from the outside supplier, since the relevant cost is lower than the cost of continuing production. The answer is C) $666,000.

Song,a Division of Carolina Enterprises,currently Makes 100,000 Units of a Product