Question

Bannister Co. is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units follows: Direct material $ 45,000 Direct labor 30,000 Factory overhead (30% is variable) 98,000 If Bannister can buy 1,000 units from an outside supplier for $100,000, it should: Multiple Choice Make the product because current factory overhead is less than $100,000. Make the product because the cost of direct material plus direct labor of manufacturing is less than $100,000. Buy the product because the total incremental costs of manufacturing are greater than $100,000. Buy the product because total fixed and variable manufacturing costs are greater than $100,000. Make the product because factory overhead is a sunk cost.

Answer 1

Buy the product because the total incremental costs of manufacturing are greater than $100,000.

Step-by-step explanation:

Relevant cost of making the product = 45000 +30,000 + (30%× 98,000)

=$ 104,400

Cost of buying the product = $100,000

Difference in cost = 104,400- $100,000 = $4,400.

Note the balance of 70% of the fixed manufacturing overhead id is a sunk cost which would be incurred which ever decision is taken.

The incremental cost of making is greater the cost of buying by $4,400. To buy from the outside supplier would mean Bannister Co saving $4,400