Factor Co. can produce a unit of product for the following costs: Direct materia

Question

Factor Co. can produce a unit of product for the following costs: Direct material $7.10 Direct labor 23.10 Overhead 35.50 Total costs per unit $65.70 An outside supplier offers to provide Factor with all the units it needs at $38.85 per unit. If Factor buys from the supplier, the company will still incur 70% of its overhead. Factor should choose to: Buy since the relevant cost to make it is $30.20. Buy since the relevant cost to make it is $40.85. Make since the relevant cost to make it is $40.85. Buy since the relevant cost to make it is $55.05. Make since the relevant cost to make it is $30.20.

Explanation / Answer

Solution:

As cost of buying is $38.85 which is lesser than relevant cost to make, therefore factor should choose buy option.

Hence correct choice is "Buy since the relevant cost to make it is $40.85"

Computation of relevant cost to make - Factor company Particulars Amount Direct material $7.10 Direct labor $23.10 Avoidable overhead ($35.50*30%) $10.65 Relevant cost to make $40.85

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