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A company is considering buying a component part that it currently makes. Which of the following items related to the production equipment currently being used to make the component is relevant to the decision?

a. Annual depreciation charges for the equipment
b. Original cost for the equipment
c. Alternative uses for the equipment
d. Accumulated depreciation for the equipment

User Samel
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1 Answer

3 votes

Final answer:

The only relevant item to the decision of buying a component that a company currently makes is the c. alternative uses for the equipment. Depreciation charges, original cost, and accumulated depreciation are sunk costs and not relevant to the decision.

Step-by-step explanation:

In a situation where a company is considering buying a component part it currently makes, the relevant financial considerations include any potential alternative uses for the equipment currently being used to make the component. This is because the company can potentially generate revenue or save costs by reallocating the equipment to other productive uses. On the other hand, the annual depreciation charges, original cost, and accumulated depreciation are not directly relevant to the decision, as they are sunk costs and do not affect the incremental cash flows associated with the decision to make or buy the component.

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