Question

The company has an offer from Value Valves to produce the part for $2,100 per unit and supply 1,000 valves (the number needed for the next operating cycle). If the company accepts this offer and shuts down production of the valves, production workers and supervisors will be reassigned to other areas. The equipment cannot be used elsewhere in the company and it has not market value. However, the space occupied by the production of the valve can be used by another production group that is currently leasing space for $55,000 per year.
Should the company make or buy the valve?
Answer these questions:
a. Supervisory salary is an avoidable cost if the company decides to buy the valves.
b. Depreciation of building is an avoidable cost if the company decides to buy the valves.
c. The $55,000 cost of leasing space is an opportunity cost associated with continuing production of the valve.
d. The depreciation of equipment is an opportunity cost assiciated with continuing production of the valve.
e. Depreciation of building is a sunk cost even if the company continues with production of the valve.
f. Supervisory salary is a sunk cost even if the company continues with production of the valve.

Answer 1

1)Supervisory salary is an avoidable cost if the company decides to buy the valves.

No, Supervisory salary is sunk cost and hence irrelevant

2)Depreciation of building is an avoidable cost if the company decides to buy the valves

No ,Even depreciation is sunk cost hence this is also irrelevant

3) The $55,000 cost of leasing space is an opportunity cost associated with continuing production of the valve

Yes this becomes relevant

4) The depreciation of equipment is an opportunity cost assiciated with continuing production of the valve.

Yes this becomes relevant, since this Equipment can only be used for production of vlaves

5) Depreciation of building is a sunk cost even if the company continues with production of the valve

Yes hence irrelevant

6)  Supervisory salary is a sunk cost even if the company continues with production of the valve.

Yes hence irrelevant

So we can infer that if the leasing space and depreciation expense and cost of making valves doesnot exceed 2100000, then valves are to be made else valves shall have to be purchased