Factor Co. can produce a unit of product for the following costs: Direct material $ 8.40 Direct labor 24.40 Overhead 42.00 Total costs per unit $ 74.80 An outside supplier offers to provide Factor with all the units it needs at $43.40 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 $46.45.

Explanation:

given data:

Direct material = $ 8.40

Direct labor = 24.40

Overhead = 42.00

Total costs per unit = $ 74.80

had to complete the question.

Multiple Choice

Buy since the relevant cost to make it is $63.85.

Make since the relevant cost to make it is $46.45.

Buy since the relevant cost to make it is $46.45.

Make since the relevant cost to make it is $33.40.

Buy since the relevant cost to make it is $33.40.

Solution:

Relevant cost to consider = Direct Material + Direct labor + (Overhead * 30%)

= $8.70 + $24.70 + ($43.50 * 30%)

= $46.45

The units should purchased from the outside supplier.

Explanation:

production costs:

Direct material $8.40

Direct labor $24.40

Overhead $42.00

Total costs per unit $74.80

avoidable costs = $8.40 + $24.40 + (30% x $42) = $45.40

unavoidable costs = $74.80 - $45.40 = $29.40

costs of purchasing from outside vendor = $43.40 + $29.40 = $72.80

since the total costs of purchasing the unit from an outside vendor are lower than the total production costs, then they should buy them from the outside supplier.

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