Question

Beta Inc. can produce a unit of Zed for the following costs:

Direct material 10
Direct labor 20
Overhead 50
Total costs
per unit $80
An outside supplier offers to provide Beta with all the Zed units it needs at $58 per unit. If Beta buys from the supplier, it will still incur 40% of its overhead. Beta should:____.
A. Buy Zed since the relevant cost to make it is $80.
B. Buy Zed since the relevant cost to make it is $30.
C. Make Zed since the relevant cost to make it is $30.
D. Buy Zed since the relevant cost to make it is $60.
E. Make Zed since the relevant cost to make it is $60.

Answer 1

The correct answer is D.

Step-by-step explanation:

First, we will determine the unitary production cost:

Unitary production cost= 10 + 20 + (0.6*50)

Unitary production cost= $60

We only consider the avoidable overhead costs.

Buy= $58 per unit

The unitary cost of buying is lower than making in-house by $2.