Castro Company makes and sells a single product. Castro incurred the following c

Question

Castro Company makes and sells a single product. Castro incurred the following costs in its most recent fiscal year.

-Materials cost ($9 per unit)

-Company president’s salary

-Depreciation on manufacturing equipment

-customer billing costs (1% of sales)

-rental cost of manufacturing facility

-advertising costs ($2,00,000 per year)

-labor cost ($8 per unit)

-Sales commissions (1.50% of sales)

-salaries of administrative personnel

-shipping and handling ($0.50 per unit)

- depreciation on office furniture

-manufacturing supplies ($0.25 per unit)

-production supervisor’s salary

Castro could purchase the products that it currently makes. If it purchased the items, the company would continue to sell them using its own logo, advertising program, and sales staff.

QUESTION: Identify each cost as relevant or irrelevant to the outsourcing decision and indicate whether the cost is fixed or variable relative to the number of products manufactured and sold.

Explanation / Answer

Relevant or Irrelavant Nature Note -Materials cost ($9 per unit) Relevant Cost Variable -Company president’s salary Irrelevant Cost Fixed It would be incurred in either make or buy -Depreciation on manufacturing equipment Irrelevant Cost Fixed It is Sunk Cost -customer billing costs (1% of sales) Irrelevant Cost Variable It would be incurred in either make or buy -rental cost of manufacturing facility Relevant Cost Fixed -advertising costs ($2,00,000 per year) Irrelevant Cost Fixed It would be incurred in either make or buy -labor cost ($8 per unit) Relevant Cost Variable -Sales commissions (1.50% of sales) Irrelevant Cost Variable It would be incurred in either make or buy -salaries of administrative personnel Irrelevant Cost Fixed It would be incurred in either make or buy -shipping and handling ($0.50 per unit) Irrelevant Cost Variable It would be incurred in either make or buy - depreciation on office furniture Irrelevant Cost Fixed It is Sunk Cost -manufacturing supplies ($0.25 per unit) Relevant Cost Variable -production supervisor’s salary Relevant Cost Fixed

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