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. $$\begin{array}{l}
\text { Manufacturing costs: }\
\begin{array} { l r }
\text { Variable } & \$ 540,000 \
\text { Fixed } & 180,000 \
\text { located corporate administrative cost } & 60,000
\end{array}
\end{array}$$ 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:
A) $540,000.
B) $594,000.
C) $666,000.
D) $720,000.
E) $726,000.

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. $$\begin{array}{l}
\text { Manufacturing costs: }\
\begin{array} { l r } 
\text { Variable } & \$ 540,000 \
\text { Fixed } & 180,000 \
\text { located corporate administrative cost } & 60,000
\end{array}
\end{array}$$ 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:
A) $540,000.
B) $594,000.
C) $666,000.
D) $720,000.
E) $726,000.

Quizplus · Accepted Answer

The relevant cost includes the variable manufacturing costs ($540,000) and the portion of fixed costs that would not be eliminated if production is discontinued. Since 70% of fixed costs would be reduced, 30% would remain, which is $54,000 (30% of $180,000). Therefore, the relevant cost is $540,000 + $54,000 = $594,000.

Song, a Division of Carolina Enterprises, Currently Makes 100,000 Units