Behemoth Motors Corp. (Bmc)

Behemoth Motors Corp. (BMC) is a major manufacturer of automobiles in the United States and has decided to manufacture a Global Positioning System navigator (GPSN) in all of its Sports Utility Vehicles (SUV) beginning with the 2011 model year. The company has estimated that the manufacturing cost per unit as $425 per unit. Wally Wizard, the GPSN manager, has been approached by Far East Enterprises, Ltd (FEE) who has offered to outsource these units for BMC at the rate of $400 per unit. Here, two alternatives are available for Wally Wizard i.e., either he has to manufacture GPSN or it can purchase from FEE. While taking decision, Wally Wizard has to consider only the relevant costs. Relevant costs are those costs which will vary among alternatives i.e., relevant costs are expected future costs which differ among the alternatives. Incremental or differential costs should be considered as it differs among alternatives. Sunk costs are not relevant for the decision making as they are historical costs. Sunk costs are those costs which are ALREADY incurred and cannot be recovered. For example, when there is decision to start the new business in the place of old business, the initial costs of old business is irrelevant and it is sunk costs. Only future costs i.e., prospective costs should be considered for the decision making. In the present case, direct material costs will be incurred only if there is manufacture. If the manufacturing is stopped, direct material costs will not be incurred i.e., can be avoided. Therefore, direct material cost is relevant for the decision making.

The employees can be laid off. Therefore, direct labor can be avoided if the production is stopped. Therefore, direct labor cost is relevant costs. However, in the present case, the company needs to pay the penalty of $66000 per year for period of four years. This penalty amount should be added to the purchase costs as this amount should be paid if the company has decided to go for purchase....