MC Qu. 49 Epsilon Co. can produce a unit of product ... Epsilon Co. can produce a unit of product for the following costs: Direct material $ 8.90 Direct labor 24.90 Overhead 44.50 Total costs per unit $ 78.30 An outside supplier offers to provide Epsilon with all the units it needs at $64.50 per unit. If Epsilon buys from the supplier, the company will still incur 40% of its overhead. Epsilon should choose to:

Answer: Produce in-house due to a relevant cost of$60.50

Explanation:

This question requires the calculation of the relevant cost of making the products in-house.

The relevant cost formula calculates how much it would cost if the amount to be saved was removed. If it is lower than the outside price, the company should produce in house.

The formula is,

Relevant Costs = Direct Material + Direct Labor - Avoidable Overhead

= 8.90 + 24.90 + 44.50 (1 - 0.4)

= 8.90 + 24.90 + 26.70

= $60.50

The relevant cost of making the product in-house is $60.50 which is less than $64.50 so Epsilon should choose to produce in-house.

Epsilon should choose to produce the product because it will save $12 per unit.

Explanation:

We need to calculate the manufacturing cost of the product and then compare it to the purchase price and the fixed cost after purchase.

Manufacturing Cost:

Direct Material $8.90

Direct Labor $24.90

Variable Overhead $44.50

Total cost $78.30

Purchasing cost:

Purchase price $64.5

Overhead cost $25.8

($64.50 x 40%)

Total cost $90.3

Saving = Purchasing cost - Manufacturing cost = $90.3 - $78.30 = $12

As given that the 40% of overhead cost is un-avoidable because it has to incurred even the product is purchase from the outside supplier.