Opportunity Cost - The qualitative factors in this decision...

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Opportunity Cost The foregoing make-or-buy analysis is complete only if the productive capacity used to make the ignition switches cannot be converted to another purpose. If there is an opportunity to use this productive capacity in some other manner, then this opportunity cost must be considered. Opportunity cost is the potential benefit that may be obtained by following an alternative course of action. To illustrate, assume that through buying the switches, Baron Company can use the released productive capacity to generate additional income of $28,000. This lost income is an additional cost of continuing to make the switches in the make-or-buy decision. This opportunity cost therefore is added to the “Make” column, for comparison. As shown, it is now advantageous to buy the ignition switches. Incremental analysis—make or buy, with opportunity cost
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Unformatted text preview: The qualitative factors in this decision include the possible loss of jobs for employees who produce the ignition switches. In addition, management must assess how long the supplier will be able to satisfy the company's quality control standards at the quoted price per unit. before you go on. .. Do it! Make or Buy Juanita Company must decide whether to make or buy some of its componen costs of producing 166,000 electrical cords for its floor lamps are as follows. Instead of making the electrical cords at an average cost per unit of $1.00 ($166,000 166,000), the company has an opportunity to buy the cords at $0 per unit. If the company purchases the cords, all variable costs and one-fourt the fixed costs will be eliminated. Solution...
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Opportunity Cost - The qualitative factors in this decision...

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