Epsilon Co. can produce a unit of product for the following costs: An outside su

Question

Epsilon Co. can produce a unit of product for the following costs:

An outside supplier offers to provide Epsilon with all the units it needs at $61.50 per unit. If Epsilon buys from the supplier, the company will still incur 40% of its overhead. Epsilon should choose to:

Multiple Choice

Buy since the relevant cost to make it is $74.10.

Make since the relevant cost to make it is $57.50.

Buy since the relevant cost to make it is $49.20.

Make since the relevant cost to make it is $49.20.

Buy since the relevant cost to make it is $57.50.

Direct material $ 8.30 Direct labor 24.30 Overhead 41.50 Total costs per unit $ 74.10

Explanation / Answer

Relevant cost to produce=Direct materials+Direct labor+(OVerheads*60%)(Since 40% would be incurreed irrespectively)

=(8.3+24.3+(41.5*0.6))

=$57.50

Hence the product should be made since the relevant cost to make it is $57.50.(B).

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