Alpha Co. can produce a unit of Beta for the following costs: An outside supplier offers to provide Alpha with all the Beta units it needs at $60 per unit. If Alpha buys from the supplier, Alpha will still incur 40% of its overhead. Alpha should:
A) Buy Beta since the relevant cost to make it is $72.
B) Make Beta since the relevant cost to make it is $56.
C) Buy Beta since the relevant cost to make it is $48.
D) Make Beta since the relevant cost to make it is $48.
E) Buy Beta since the relevant cost to make it is $56.

Question

Quizplus · Accepted Answer

DTo determine whether Alpha Co. should make or buy Beta, we need to compare the relevant costs of both options. The relevant cost to make Beta includes all variable costs and any avoidable (or incremental) fixed costs. The cost to buy Beta is the price quoted by the supplier, $60 per unit. If Alpha buys from the supplier, it will still incur 40% of its overhead, indicating that 60% of the overhead is avoidable if it chooses to buy instead of make. Without the specific breakdown of costs provided in the question, we can't calculate the exact relevant cost to make Beta. However, the correct decision would depend on comparing the avoidable costs of making Beta (including direct materials, direct labor, variable overhead, and any avoidable fixed overhead) to the cost of buying it at $60 per unit.Choices B and D suggest different relevant costs for making Beta, but without the detailed cost breakdown, we can't definitively calculate the relevant cost. The correct answer would involve a detailed calculation based on the provided costs, which are missing from the question. Therefore, based on the information given, we cannot accurately choose between B and D. However, the principle stands that the decision should be based on comparing the relevant costs of making versus buying, considering all avoidable costs when making Beta.

Alpha Co Can Produce a Unit of Beta for the Following