Question

Factor Co. can produce a unit of product for the following costs:

Direct material $ 8.10
Direct labor 24.10
Overhead 40.50
Total product cost per unit $ 72.70
1. An outside supplier offers to provide Factor with all the units it needs at $42.35 per unit. If Factor buys from the supplier, the company will still incur 70% of its overhead. Factor should choose to ___________?

Answer 1

the relevant cost to make is $44.35

Step-by-step explanation:

given data

Direct material = $ 8.10

Direct labor = 24.10

Overhead = 40.50

Total product cost per unit = $ 72.70

Cost of purchase = $42.35

solution

we know here that 70% of overhead cost is unavoidable

so we can say that it will not be considered for decision making

so here Cost of manufacturing will be

Cost of manufacturing = $8.10 + $24.10 + ( 30% of $40.50 )

Cost of manufacturing = $44.35

and

Cost of purchase is = $42.35

so here we can say the relevant cost to make is $44.35