Alpha Co. can produce a unit of Beta for the following costs: Direct material $8

Question

Alpha Co. can produce a unit of Beta for the following costs:
Direct material $8
Direct labor 24
Overhead 40
Total costs per unit $72

An outside supplier offers to provide Alpha with all the Beta units it needs at $60 per unit. If Alpha buys from the supplier, Alpha will still incur 40% of its overhead. Alpha should:
Buy Beta since the relevant cost to make it is $72.
Make Beta since the relevant cost to make it is $56.
Buy Beta since the relevant cost to make it is $48.
Make Beta since the relevant cost to make it is $48.
Buy Beta since the relevant cost to make it is $56.

Explanation / Answer

Make Beta since the relevant cost to make it is $56.

Relevant costs are
Direct material ... $8
Direct labor ... $24
Overhead ... $24 ($40 x 60%)
Total relevant costs are $56

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