Textel is thinking about having one of its products manufactured by a subcontractor.Currently, the cost of manufacturing 1,000 units follows: $\begin{array}{lr}
\text { Direct material } & \$ 45,000 \
\text { Direct labor } & 30,000 \
\text { Factory overhead (1/3 is variable) } & 98,000
\end{array}$ If Textel can buy 1,000 units from a subcontractor for $100,000, it should:
A)Make the product because current factory overhead is less than $100,000.
B)Make the product because the cost of direct material plus direct labor of manufacturing is less than $100,000.
C)Buy the product because the total incremental costs of manufacturing are greater than $100,000.
D)Buy the product because total fixed and variable manufacturing costs are greater than $100,000
E)Make the product because factory overhead is a sunk cost.

Question

Quizplus · Accepted Answer

The total incremental costs of manufacturing 1,000 units currently equal $173,000 [(45,000+30,000) + (2/3)*98,000]. The cost of buying the same 1,000 units from a subcontractor is $100,000, which is less than the incremental cost of manufacturing it in-house. Therefore, Textel should buy the product instead of manufacturing it.

Textel Is Thinking About Having One of Its Products Manufactured