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:

Answer 1

Answer: Beta should buy from the outside supplier

Step-by-step explanation:

If Beta produces the product itself, only avoidable costs would be accounted for:

= Direct labor + Direct material + Unavoidable overhead

= 10 + 20 + ( (1 - 40%) * 50)

= 10 + 20 + 30

= $60

If however, Beta buys the product, they will buy at $58 per unit which is less than the $60 they would make it for.

Beta should buy the product because they will be able to save $2 per unit.