Frederick Co. is thinking about having one of its products manufactured by an outside supplier. Currently, the cost of manufacturing 5,000 units is: Direct material $ 62,000 Direct labor 47,000 Variable factory overhead 38,000 Factory overhead 52,000 If Frederick can buy 5,000 units from an outside supplier for $130,000, it should____________.

Question

12-12-2019
Business

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Frederick Co. is thinking about having one of its products manufactured by an outside supplier. Currently, the cost of manufacturing 5,000 units is: Direct material $ 62,000 Direct labor 47,000 Variable factory overhead 38,000 Factory overhead 52,000 If Frederick can buy 5,000 units from an outside supplier for $130,000, it should____________.

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innthomas00158 innthomas00158 · Answer 1 · 2019-12-17T01:31:19+01:00

The options are:

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

b. Make the product because the cost of direct material plus direct labor of manufacturing is less than $130,000.

c. Make the product because factory overhead is a sunk cost.

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

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

Answer: E

Explanation:

Incremental cost refers to the cost incurred for producing an additional unit of commodity. In this case the incremental cost equals $147,000(62,000+47,000+38,000). Since this is above the what the outside supplier is offering, it makes no sense to produce internally. The fixed cost of 52,000 representing factory overhead is sunk cost and will be incurred anyway even if production is not possible.