Textel is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units follows: If Textel can buy 1,000 units from a subcontractor for $100,000, it should:

Question

Textel is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units follows:  If Textel can buy 1,000 units from a subcontractor for $100,000, it should:

Quizplus · Accepted Answer

The total incremental costs of manufacturing should include both variable and fixed costs. If Textel can buy 1,000 units from a subcontractor for $100,000, it would be more cost-effective for Textel to buy the product because the total incremental costs of manufacturing are greater than $100,000. The current factory overhead costs may be less than $100,000, but fixed costs such as rent and equipment depreciation should also be taken into account. The cost of direct material plus direct labor of manufacturing is also not relevant in this scenario. Additionally, factory overhead is a sunk cost, meaning it has already been incurred and should not be factored into future decisions.

Textel Is Thinking About Having One of Its Products Manufactured