Frederick Co. is thinking about having one of its products manufactured by a sub

Question

Frederick Co. is thinking about having one of its products manufactured by a subcontractor.

Currently, the cost of manufacturing 5,000 units follows:

If Frederick can buy 5,000 units from a subcontractor for $130,000, it should:

Make the product because current factory overhead is less than $130,000.

Make the product because the cost of direct material plus direct labor of manufacturing is less than $130,000.

Make the product because factory overhead is a sunk cost.

Buy the product because total fixed and variable manufacturing costs are greater than $130,000.

Buy the product because the total incremental costs of manufacturing are greater than $130,000.

Direct material $62,000 Direct labor 47,000 Variable factory overhead 38,000 Factory overhead 52,000

Explanation / Answer

Hi Dear Student !

Answer to this problem is 'Buy the product because the total incremental Costs of Manufacturing are greater than $130000.'

Answer is Last Option !

Explanation:

See Total Variable Cost to Manufacturing is

Material cost + Labour Cost+ Variable Overhead

62000+47000+38000= $147000

Where Incremental Cost mean that cost which only occurs when we do some activity like in this case activity is manufacturing.

Fixed Cost is always a irrelevant Cost while taking decision.

Pleasure Teaching You!!

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