Question

Epsilon currently pays $76 per unit to buy a part for a product it sells. Epsilon has excess capacity, and estimates that making the part would incur variable costs of $8 for direct materials and $40 for direct labor. Epsilon's normal predetermined overhead rate is 150% of direct labor cost, but management computes an incremental overhead rate of $16.00 per unit to make this part. Epsilon should choose to:___.

A. Buy since the relevant cost to make it is $82 per unit.
B. Make since the relevant cost to make it is $61.20 per unit.
C. Buy since the relevant cost to make it is more than $74.00 per unit.

Answer 1

Epsilon should choose to buy the part since the relevant cost to make it is $82 per unit.

Step-by-step explanation:

Epsilon should choose to buy the part since the relevant cost to make it is $82 per unit, as shown in the question.

The relevant cost to buy the part is $76 per unit, which is lower than the cost to make it.

Therefore, it is more cost-effective for Epsilon to buy the part rather than make it.