Question

Tuscaloosa Company manufactures a hand-held computer. The company expects production of 7,000 units this year. Currently, Tuscaloosa produces the processor, which is a component of the computer. Tuscaloosa has received an offer from Auburn, Inc., to supply the processor.

If Tuscaloosa discontinues production of the processor, the company will be able to eliminate its product-level costs because no other products along the same line are produced by the company. However, due to its concern for quality, the company will have to inspect each processor made by Auburn. Various costs and items are described below:

Required:

Using the drop menus, classify each cost item in the context of the outsourcing decision as: Relevant (Varies between alternatives), Relevant (Opportunity cost), Irrelevant (Unavoidable future cost) or Irrelevant (Sunk cost).

(Note: A cost varies if the amount of the cost differs between the two alternatives: (1) continuing to make the processors or (2) purchasing the processors from Auburn.)

Cost of purchasing the processors from Auburn	Answer 1Choose...Relevant (Varies between alternatives)Irrelevant (Unavoidable future cost)Irrelevant (Sunk cost)Relevant (Opportunity cost)
Income that can be earned from renting the idled facilities if Tuscaloosa no longer makes the processors	Answer 2Choose...Relevant (Varies between alternatives)Irrelevant (Unavoidable future cost)Irrelevant (Sunk cost)Relevant (Opportunity cost)
Direct materials costs	Answer 3Choose...Relevant (Varies between alternatives)Irrelevant (Unavoidable future cost)Irrelevant (Sunk cost)Relevant (Opportunity cost)
Direct labor costs	Answer 4Choose...Relevant (Varies between alternatives)Irrelevant (Unavoidable future cost)Irrelevant (Sunk cost)Relevant (Opportunity cost)
Variable overhead costs	Answer 5Choose...Relevant (Varies between alternatives)Irrelevant (Unavoidable future cost)Irrelevant (Sunk cost)Relevant (Opportunity cost)
Cost of equipment used to make processors	Answer 6Choose...Relevant (Varies between alternatives)Irrelevant (Unavoidable future cost)Irrelevant (Sunk cost)Relevant (Opportunity cost)
Fixed manufacturing overhead	Answer 7Choose...Relevant (Varies between alternatives)Irrelevant (Unavoidable future cost)Irrelevant (Sunk cost)Relevant (Opportunity cost)
Inspection costs if processor is purchased from Auburn	Answer 8Choose...Relevant (Varies between alternatives)Irrelevant (Unavoidable future cost)Irrelevant (Sunk cost)Relevant (Opportunity cost)
Processor Department Manager's Salary	Answer 9Choose...Relevant (Varies between alternatives)Irrelevant (Unavoidable future cost)Irrelevant (Sunk cost)Relevant (Opportunity cost)
Depreciation on machinery used to make the processors	Answer 10Choose...Relevant (Varies between alternatives)Irrelevant (Unavoidable future cost)Irrelevant (Sunk cost)Relevant (Opportunity cost)
Allocated corporate costs	Answer 11Choose...Relevant (Varies between alternatives)Irrelevant (Unavoidable future cost)Irrelevant (Sunk cost)Relevant (Opportunity cost)

Answer 1