Factor Company estimates that producing a unit of product would require $9.00 per unit of direct materials and $25.00 per unit of direct labor.

 Factor Company estimates that producing a unit of product would require $9.00 per unit of direct materials and $25.00 per unit of direct labor. Factor Company normally applies overhead using a predetermined overhead rate of 150% of direct labor cost. Factor Company estimates incremental overhead of $13.50 per unit of product. An outside supplier offers to provide Factor Company with all the units it needs at a price of $45.50 per unit. Factor Company should choose to:

Multiple Choice

Buy since the relevant cost to make it is $34.00.


Make since the relevant cost to make it is $47.50.


Make since the relevant cost to make it is $34.00.


Buy since the relevant cost to make it is $65.50.


Buy since the relevant cost to make it is $47.50. Correct

 
Explanation
Relevant cost to make one unit:    
Direct material    $ 9.00
Direct labor    25.00
Overhead saved (45.00% × 30)    13.50
Total relevant product cost to make    $ 47.50