Epsilon Co. can produce a unit of product for the following costs: $\begin{array}{llcc}
\text { Direct material } &\$8\
\text { Direct labor } &24\
\text { Overhead } &\underline{40}\
\text {Total costs per unit } &\$72\
\end{array}$
An outside supplier offers to provide Epsilon with all the units it needs at $60 per unit. If Epsilon buys from the supplier, the company will still incur 40% of its overhead. Epsilon should choose to:
A) Buy since the relevant cost to make it is $72.
B) Make since the relevant cost to make it is $56.
C) Buy since the relevant cost to make it is $48.
D) Make since the relevant cost to make it is $48.
E) Buy since the relevant cost to make it is $56.

Question

Epsilon Co. can produce a unit of product for the following costs: $\begin{array}{llcc}
  \text { Direct material } &\$8\
 \text { Direct labor } &24\
 \text { Overhead } &\underline{40}\
 \text {Total costs per unit } &\$72\
\end{array}$
 An outside supplier offers to provide Epsilon with all the units it needs at $60 per unit. If Epsilon buys from the supplier, the company will still incur 40% of its overhead. Epsilon should choose to:
A) Buy since the relevant cost to make it is $72.
B) Make since the relevant cost to make it is $56.
C) Buy since the relevant cost to make it is $48.
D) Make since the relevant cost to make it is $48.
E) Buy since the relevant cost to make it is $56.

Quizplus · Accepted Answer

The relevant cost to make the product is $56, which includes direct material ($8), direct labor ($24), and 40% of overhead ($16). This is less than the $60 per unit cost from the supplier.

Epsilon Co An Outside Supplier Offers to Provide Epsilon with All the Following