Textel is thinking about having one of its products manufactured by a subcontractor.Currently,the cost of manufacturing 1,000 units follows:
$\begin{array}{lr}
\text { Direct material } & \$ 45,000 \
\text { Direct labor } & 30,000 \
\text { Factory overhead ( } 1 / 3 \text { is variable) } & 98,000
\end{array}$

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

Textel is thinking about having one of its products manufactured by a subcontractor.Currently,the cost of manufacturing 1,000 units follows:
$\begin{array}{lr}
\text { Direct material } & \$ 45,000 \
\text { Direct labor } & 30,000 \
\text { Factory overhead ( } 1 / 3 \text { is variable) } & 98,000
\end{array}$

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.

Quizplus · Accepted Answer

The total incremental cost of manufacturing 1,000 units includes direct material ($45,000), direct labor ($30,000), and variable factory overhead (1/3 of $98,000 = $32,667). The total is $107,667, which is greater than the subcontractor's price of $100,000.

Textel Is Thinking About Having One of Its Products Manufactured