Frederick Company is thinking about having one of its products manufactured by an outside supplier. Currently, manufacturing the product would cost $12.40 per unit for direct materials and $9.40 per unit for direct labor.

 Frederick Company is thinking about having one of its products manufactured by an outside supplier. Currently, manufacturing the product would cost $12.40 per unit for direct materials and $9.40 per unit for direct labor. Factory overhead is normally $10.40 per unit, and incremental overhead to make this product is $7.60 per unit. If Frederick Company can buy 5,000 units from an outside supplier for $130,000, the company should:

Multiple Choice

Make the product because factory overhead is a sunk cost.


Make the product because current factory overhead is less than $130,000.


Buy the product because the total incremental costs of manufacturing are greater than $130,000. Correct

Make the product because the total incremental costs of manufacturing are less than $130,000.


Buy the product because total fixed and variable manufacturing costs are greater than $130,000.

Answer

Buy the product because the total incremental costs of manufacturing are greater than $130,000.

Explanation
Make or Buy Analysis    Make    Buy
Direct materials    $ 12.40    
Direct labor    9.40    
Overhead (incremental)    7.60    
Cost to buy         $ 26.00
Cost per unit    $ 29.40    $ 26.00