I. Relevant costs
Fill in each of the blanks below with the correct term.
1. Relevant costs are also known as _____________.
2. An ___________ requires a future outlay of cash and is relevant for current and future decision making.
3. An ___________ is the potential benefit lost by taking a specific action when two or more alternative choices are available.
4. A ___________ arises from a past decision and cannot be avoided or changed; it is irrelevant to future decisions.
5. ___________ refer to the incremental revenue generated from taking one particular action over another.
II. Make or buy decision
Santos Company currently manufactures one of its crucial parts at a cost of $3.40 per unit. This cost is based on a normal production rate of 50,000 units per year. Variable costs are $1.50 per unit, fixed costs related to making this part are $50,000 per year, and allocated fixed costs are $45,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Santos is considering buying the part from a supplier for a quoted price of $2.70 per unit guaranteed for a three-year period. Should the company continue to manufacture the part, or should it buy the part from the outside supplier? Support your answer with analyses.