Textel is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units follows:
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 decision to choose between making or buying a product should be based on the incremental costs incurred. In this case, the incremental costs of manufacturing are the direct material and direct labor costs. If the cost of buying from a subcontractor is less than the incremental costs of manufacturing, then buying would be the better choice. It is not relevant to consider factory overhead or fixed and variable costs as they are already incurred and cannot be changed regardless of whether Textel decides to make or buy the product. Therefore, option C is the best choice as it considers the incremental costs of manufacturing versus the cost of buying from a subcontractor.

Textel Is Thinking About Having One of Its Products Manufactured