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Easton Company makes and sells scooters. Easton incurred the following costs in its most recent...

Question:

Easton Company makes and sells scooters. Easton incurred the following costs in its most recent fiscal year: Easton can currently purchase the scooters it makes from Weston Company. If the company purchases the scooters, Easton would still continue to use its own logo, sales staff, and advertising programs. If Easton outsources the scooters to Weston, which of the following costs would be relevant to the outsourcing decision? 1)Materials cost 2)Shipping and handling 3)Inspection costs 4)All of these.

Outsourcing:


When a company chooses to buy a product or service from an outside supplier rather than making it on its own, it is called outsourcing. A company may opt for outsourcing if it doesn't have enough resources or technology to make the product or if it is cheaper to outsource rather than produce on its own.

Answer and Explanation:


If Easton outsources the scooters to Weston, following cost would be relevant:


1) Material cost is relevant because if Easton chooses to outsource then it will no longer incur any material cost. This will reduce the total cost of scooters.

2) Shipping and handling cost is irrelevant because it will be incurred in either case.

3) Inspection costs are relevant to the outsourcing decision as goods made by outside suppliers have to be checked thoroughly for any defects before selling them to customers. Here we are assuming that Easton doesn't incur any inspection cost for in-house production. If it does so then inspection costs would be also irrelevant.


Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
1.3K

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