Question

The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 100,000 wheels annually are:

Direct materials	$30,000
Direct labor	$50,000
Variable manufacturing overhead	$20,000
Fixed manufacturing overhead	$70,000

An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel. If the wheels are purchased from the outside supplier, $15,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $45,000 per year. Direct labor is a variable cost.

At what purchase price for the wheels would Talbot be indifferent between making orbuying the wheels?

	A.	$1.70 per wheel
	B.	$1.60 per wheel
	C.	$1.55 per wheel
	D.	$1.15 per wheel

when determining the discount rate used for the net present value method, an entrepreneur needs to consider:

	A.	The risk of the investment
	B.	The opportunity cost of investing in one project vs. another
	C.	The rate of return on similar investments
	D.	All of the above

the cost of copier paper was:

	A.	Relevant to the decision to purchase a new copier
	B.	Not relevant to the decision to purchase a new copier
	C.	Relevant to the decision to trade-in the old copier
	D.	None of the above

which of the following was NOT a reason for outsourcing?

	A.	Outsourcing freed up capital to be used for other projects.
	B.	Outsourcing eliminated high union wages.
	C.	Outsourcing provided technical knowledge that the company lacked.
	D.	Outsourcing increased capacity without require additional factory space.

Answer 1

Total applicable avoidable expense for making:

Direct Material	$   30,000.00
Direct Labor	$   50,000.00
Variable Manufacturing	$   20,000.00
Avoidable fixed cost	$   15,000.00
Total relevant cost for making	$ 115,000.00
Add: Rent from facilities	$   45,000.00
Total cost indifference between make and buy	$ 160,000.00
Divide: Number of Wheels	100,000.00
Indifference cost per unit	$             1.60

Therefore answer is B $1.60 per wheel

Question 2

D. All of the above

Question 3

D. None of the above

Question 4

B. Outsourcing eliminated high union wages.

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