Question

An outside supplier offers to provide factor with all the units it needs at $41.38 per unit. if factor buys from the supplier, the company will still incur 65% of its overhead. factor should choose to:

Answer 1

Factor should choose to make their own product, as the cost to make them per unit is at least $10.00 cheaper, than buying from the supplier. The supplier is looking to make a profit from products that are cheaper to make, so of course they are going to mark it up slightly to gain back some of what they spent to make the product. Factor might be incurring the 65% of their overhead, however their accounts payable ledger will be smaller, as they bought wholesale supplies at a cheaper discount.