Bannister Co.is thinking about having one of its products manufactured by a subcontractor. Currently,the cost of manufacturing 1,000 units is:
$$\begin{array}{l}
\begin{array} { l l r }
\text {Direct material }&\$45,000\
\text {Direct labor }&30,000\
\text {Factory ov erhead (30 \% is variable) }&98,000
\end{array}
\end{array}$$ If Bannister can buy 1,000 units from an outside supplier 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

Bannister Co.is thinking about having one of its products manufactured by a subcontractor. Currently,the cost of manufacturing 1,000 units is:
$$\begin{array}{l}
\begin{array} { l  l r } 
\text {Direct material }&\$45,000\
\text {Direct labor }&30,000\
\text {Factory ov erhead (30 \%  is variable) }&98,000
\end{array}
\end{array}$$ If Bannister can buy 1,000 units from an outside supplier 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.

Quizplus · Accepted Answer

To determine whether to make or buy, we consider only the incremental costs that would change if the product were bought instead of made. The fixed portion of the factory overhead (70% of $98,000 = $68,600) would not change if the product were bought. The variable costs are direct material ($45,000), direct labor ($30,000), and variable factory overhead (30% of $98,000 = $29,400), totaling $104,400. Since $104,400 (the cost to make) is greater than $100,000 (the cost to buy), Bannister should buy the product.

Bannister Co If Bannister Can Buy 1,000 Units from an Outside Supplier