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28 December, 14:57

Factor Co. can produce a unit of product for the following costs: Direct material $ 8 Direct labor 24 Overhead 40 Total product cost per unit $ 72 An outside supplier offers to provide Factor with all the units it needs at $46 per unit. If Factor buys from the supplier, the company will still incur 60% of its overhead. Factor should choose to: A. Buy since the relevant cost to make it is $56. B. Make since the relevant cost to make it is $48. C. Buy since the relevant cost to make it is $48. D. Make since the relevant cost to make it is $32.

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  1. 28 December, 17:03
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    C. Buy since the relevant cost to make it is $48.

    Explanation:

    Factor Co.

    Make Buy

    Direct material $ 8

    Direct labor 24

    Overhead 40 24 (Irrelevant Cost)

    Cost of Purchase 46

    Total product cost per unit $ 72 $ 70

    Irrelevant costs are costs that continue whether the product is produced internally or purchased from outside. Here irrelevant costs are $ 24 that is 60 % of overheads.

    The relevant cost to make it is $8 + $24 + $16 (40-24) = $ 48

    It is better to buy the product as it is a little financially advantageous. $2 per unit.
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