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.

Question

Business

Dalia Juarez

13 February, 12:06

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.

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Answers (1)

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Remington Kramer · Answer 1

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.