1.
Nook Company currently produces a key part at a total cost of $180,000. Annual variable costs
are $163,000. Of the annual fixed costs, $18,000 relate specifically to this part. The remaining
fixed costs are unavoidable.
Another manufacturer has offered to supply the part annually for $175,000. The facilities
currently used to manufacture the part could be used to manufacture a new product with an
expected contribution margin of $45,500 per year. Alternatively, the facilities could be rented out
at $32,000 per year. Given all of these alternatives, what is Nook Company's lowest net relevant
cost for the parts?
A. $163,000
B. $125,000
C. $129,500
D. $181,000
Solution
The correct answer is C
Solution:
A relevant cost is a cost that differs between alternatives in a decision. Not all fixed costs are
sunk