Frederick Co.is thinking about having one of its products manufactured by a subcontractor. Currently,the cost of manufacturing 5,000 units follows: If Frederick can buy 5,000 units from a subcontractor for $130,000,it should:
A)Make the product because current factory overhead is less than $130,000.
B)Make the product because the cost of direct material plus direct labor of manufacturing is less than $130,000.
C)Make the product because factory overhead is a sunk cost.
D)Buy the product because total fixed and variable manufacturing costs are greater than $130,000.
E)Buy the product because the total incremental costs of manufacturing are greater than $130,000.

Question

Frederick Co.is thinking about having one of its products manufactured by a subcontractor. Currently,the cost of manufacturing 5,000 units follows:  If Frederick can buy 5,000 units from a subcontractor for $130,000,it should:
A)Make the product because current factory overhead is less than $130,000. 
B)Make the product because the cost of direct material plus direct labor of manufacturing is less than $130,000. 
C)Make the product because factory overhead is a sunk cost. 
D)Buy the product because total fixed and variable manufacturing costs are greater than $130,000. 
E)Buy the product because the total incremental costs of manufacturing are greater than $130,000.

Quizplus · Accepted Answer

The cost of manufacturing a unit is not given, but the total cost of manufacturing 5,000 units is provided as $245,000. If Frederick can buy these 5,000 units from a subcontractor for $130,000, it means the incremental cost of manufacturing is more than $130,000. Therefore, the best decision is to buy the product instead of manufacturing it.