Action Products Is Deciding Whether to Outsource Production of a Certain

Action Products is deciding whether to outsource production of a certain component that is included in all of its products. It currently costs Action Products $0.95 to make each component in-house. If Action Products outsources, it can buy the component ready-made for $0.80 each. If Action Products outsources, it could shut down the production facilities it is currently using to manufacture the component, and save $10,000 a year in fixed costs. After analyzing both options, Action Products decided to continue making the component in-house. In the analysis done, which of the following items would be considered an opportunity cost?

A) The difference between $0.95 and $0.80 per component
B) The savings of $10,000 per year in fixed costs
C) The difference between the fixed and variable costs to make the component in-house
D) The contract cost of $0.80 to buy from outside source

Correct Answer:

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