Question

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

Direct material $8.40
Direct labor 24.40
Overhead 42.00
Total costs per unit $74.80


An outside supplier offers to provide Epsilon with all the units it needs at $66.20 per unit. If Epsilon buys from the supplier, the company will still incur 30% of its overhead. Epsilon should choose to:

Buy since the relevant cost to make it is $74.80.

Make since the relevant cost to make it is $62.20.

Buy since the relevant cost to make it is $45.40.

Make since the relevant cost to make it is $45.40.

Buy since the relevant cost to make it is $62.20.

Answer 1

The correct answer is B.

Step-by-step explanation:

Giving the following information:

Direct material $8.40

Direct labor 24.40

Overhead 42.00

Total costs per unit $74.80

Purchasing price= $66.20 per unit.

First, we need to determine the real production cost per unit. If 30% of overhead is not avoidable, we will take into account only 70% of overhead.

Total production cost per unit= 8.4 + 24.4 + (42*0.7)= $62.2

It is cheaper to make the unit. If the unit is produced, the company will save $4 per unit.