Question

Factor Co. can produce a unit of product for the following costs: Direct material $ 8 Direct labor 24 Overhead 40 Total product cost per unit $ 72 An outside supplier offers to provide Factor with all the units it needs at $46 per unit. If Factor buys from the supplier, the company will still incur 60% of its overhead. Factor should choose to: A. Buy since the relevant cost to make it is $56. B. Make since the relevant cost to make it is $48. C. Buy since the relevant cost to make it is $48. D. Make since the relevant cost to make it is $32.

Answer 1

Answer:

C. Buy since the relevant cost to make it is $48.

Explanation:

Factor Co.

                                               Make             Buy

Direct material                      $ 8

Direct labor                             24

Overhead                                40                   24 ( Irrelevant Cost)

Cost of  Purchase                                          46                                              

Total product cost per unit $ 72                $ 70

Irrelevant costs are costs that continue whether the product is produced internally or purchased from outside. Here irrelevant costs are $ 24 that is 60 % of overheads.

The relevant cost to make it is $8+ $24+ $16(40-24)= $ 48

It is better to buy the product as it is a little financially advantageous. $2 per unit.