Sleep Tight Company manufactures pillows using an activity-based costing system. The following information is provided for the month of June:
Each pillow consists of 4 parts and the total direct materials cost per pillow is $3.50.
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If the cost to purchase the same pillow from a supplier is $21.00, what should Sleep Tight do to maximize profits?
A) Continue to manufacture the pillow.
B) Since the cost to manufacture the pillow is also $21.00, the company would make the same profit whether it bought the pillow or manufactured it.
C) Purchase the pillow from the supplier.
D) Close down the business.

Question

Sleep Tight Company manufactures pillows using an activity-based costing system. The following information is provided for the month of June:
 Each pillow consists of 4 parts and the total direct materials cost per pillow is $3.50.
-
If the cost to purchase the same pillow from a supplier is $21.00, what should Sleep Tight do to maximize profits?
A) Continue to manufacture the pillow. 
B) Since the cost to manufacture the pillow is also $21.00, the company would make the same profit whether it bought the pillow or manufactured it. 
C) Purchase the pillow from the supplier. 
D) Close down the business.

Quizplus · Accepted Answer

To maximize profits, Sleep Tight should purchase the pillow from the supplier if the cost to manufacture it is the same as the purchase cost, as this would save on manufacturing overhead and other associated costs.

Sleep Tight Company Manufactures Pillows Using an Activity-Based Costing System