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Q1) Jones Company produces widgets.  Old Ham Company has approached Jones with proposal to sell company one of components used to make widgets at the price of $100,000 for 50,000 units.  Jones is presently making these components in its own factory.  Following costs are associated with this part of process when 50,000 units are produced:

 

Direct material

$44,000

Direct labor

20,000

Manufacturing overhead

    60,000

Total

$124,000

 

Manufacturing overhead comprises of $32,000 of costs that will be eliminated if components are no longer made by Jones.  Remaining manufacturing overhead will continue whether or not Jones produces components. 

 

i) Determine the amount of avoidable costs if Jones purchases rather than makes components?

 

A)  $60,000

 

B)  $96,000

 

C) $124,000

 

D) $100,000

 

ii) Value of benefits foregone by choosing one decision alternative over another is a(n)

 

A) Differential revenue.

 

B) Sunk cost.

 

C) Opportunity cost.

 

D) Incremental benefit.

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