Question

Factor Co. can produce a unit of product for the following costs: Direct material $ 7.80 Direct labor 23.80 Overhead 39.00 Total product cost per unit $ 70.60 An outside supplier offers to provide Factor with all the units it needs at $45.20 per unit. If Factor buys from the supplier, the company will still incur 60% of its overhead. Factor should choose to:

Answer 1

Answer:

Buying option

Explanation:

In this question we compare the buying cost and the making cost

The buying cost comprise of

= Direct material per unit + Direct labor per unit + overhead per unit × remaining percentage

= $7.80 + $23.80 + $39 × 40%

= $7.80 + $23.80 + $15.60

= $47.20

And, the buying cost is $45.20

Based on these two cost, the Factor should use the buying cost as it is less than the making cost