Question

Wilson is currently producing a component for one of its products. Wilson has received an offer to buy the component from an outside supplier. A machine is currently being rented to manufacture the component. If the company buys the component, the rental will be cancelled What is the rent on the machine, in relation to the decision to make or buy the component?

a) Sunk and therefore not relevant
b) Avoidable and therefore not relevant
c) Avoidable and therefore relevant
d) Unavoidable and therefore relevant

Answer 1

Option B

Step-by-step explanation:

In simple words, avoidable costs refers to those expenditures which can be avoided by the management of the business if they want to as such expenditures are usually made for additional support.

Irrelevant costs include factors which will not be impacted by a management action, whether positively or negatively. Consequently, unnecessary factors, such as static overhead as well as sunken factors, are overlooked in making the choice. Nonetheless, in addition to ultimately save the company it is important for a management to be able to discern an insignificant expense.