Frederick Co. is thinking about having one of its products manufactured by an outside supplier. Currently, the cost of manufacturing 5,000 units follows: $$\begin{array} { l r }
\text { Direct material } & \$ 62,000 \
\text { Direct labor } & 47,000 \
\text { Variable factory overhead } & 38,000 \
\text { Fired factory overhead } & 52,000
\end{array}$$ If Frederick can buy 5,000 units from an outside supplier for $130,000, it should:
A) Buy the product because the total incremental costs of manufacturing are greater than $130,000.
B) Make the product because factory overhead is a sunk cost.
C) Make the product because the cost of direct material plus direct labor of manufacturing is less than $130,000.
D) Make the product because current factory overhead is less than $130,000.
E) Buy the product because total fixed and variable manufacturing costs are greater than $130,000.

Question

Frederick Co. is thinking about having one of its products manufactured by an outside supplier. Currently, the cost of manufacturing 5,000 units follows: $$\begin{array} { l r } 
\text { Direct material } & \$ 62,000 \
\text { Direct labor } & 47,000 \
\text { Variable factory overhead } & 38,000 \
\text { Fired factory overhead } & 52,000
\end{array}$$ If Frederick can buy 5,000 units from an outside supplier for $130,000, it should:
A) Buy the product because the total incremental costs of manufacturing are greater than $130,000.
B) Make the product because factory overhead is a sunk cost.
C) Make the product because the cost of direct material plus direct labor of manufacturing is less than $130,000.
D) Make the product because current factory overhead is less than $130,000.
E) Buy the product because total fixed and variable manufacturing costs are greater than $130,000.

Quizplus · Accepted Answer

In this scenario, the relevant cost to consider is the total incremental cost of manufacturing, which includes direct materials, direct labor, and variable factory overhead. The fixed factory overhead is a sunk cost and should not be considered in the decision-making process. If the cost of manufacturing 5,000 units exceeds $130,000, it would be more cost-effective to buy the products from an outside supplier. Therefore, the best choice is A.

Frederick Co If Frederick Can Buy 5,000 Units from an Outside Supplier