Question

actor Co. can produce a unit of product for the following costs: Direct material $ 8.60 Direct labor 24.60 Overhead 43.00 Total product cost per unit $ 76.20 An outside supplier offers to provide Factor with all the units it needs at $48.40 per unit. If Factor buys from the supplier, the company will still incur 60% of its overhead. Factor should choose to:

Answer 1

Answer:

Relevant cost to make = Direct materials + Direct labor + Variable overhead

Relevant cost to make = $8.60 + $24.60 + $43.00 (1-60%)

Relevant cost to make = $8.60 + $24.60 + $17.20

Relevant cost to make = $50.40

Outside supplier cost ($48.40) < Relevant cost to make ($50.40). So, Factor should choose to buy because the relevent cost is less than outside supplier cost.