Factor Co.can produce a unit of product for the following costs: An outside supplier offers to provide Factor with all the units it needs at $46 per unit.If Factor buys from the supplier,the company will still incur 60% of its overhead.Factor should choose to:
A)Buy since the relevant cost to make it is $56.
B)Make since the relevant cost to make it is $48.
C)Buy since the relevant cost to make it is $48.
D)Make since the relevant cost to make it is $32.
E)Buy since the relevant cost to make it is $32.

Question

Factor Co.can produce a unit of product for the following costs:  An outside supplier offers to provide Factor with all the units it needs at $46 per unit.If Factor buys from the supplier,the company will still incur 60% of its overhead.Factor should choose to:
A)Buy since the relevant cost to make it is $56. 
B)Make since the relevant cost to make it is $48. 
C)Buy since the relevant cost to make it is $48. 
D)Make since the relevant cost to make it is $32. 
E)Buy since the relevant cost to make it is $32.

Quizplus · Accepted Answer

To determine the relevant cost, we first need to calculate the total cost of producing a unit of product using Factor's current method.

Total cost per unit = $11 (direct materials) + $8 (direct labor) + $22 (overhead allocated at 200% of direct labor) 
= $41

If Factor buys from the supplier, it will incur only 60% of its overhead, which is $8.80 ($22 x 0.6). 
Relevant cost per unit = $46 (purchase price from supplier) + $8.80 (60% of overhead) 
= $54.80

Therefore, it is cheaper for Factor to continue making the product, as the relevant cost to make it is only $48 ($41 + $8). Buying from the supplier would cost $46 + $8.80 = $54.80 per unit. Therefore, the company should choose to make the product.

Factor CoCan Produce a Unit of Product for the Following Costs