Bannister Co. is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units follows:
$$\begin{array} { | l | r | }
\hline \text { Direct material } & \$ 45,000 \
\hline \text { Direct labor } & 30,000 \
\hline \text { Factory overhead ( } 30 \% \text { is variable) } & 98,000 \
\hline
\end{array}$$ If Bannister can buy 1,000 units from an outside supplier for $100,000, it should:
A) Make the product because current factory overhead is less than $100,000.
B) Make the product because the cost of direct material plus direct labor of manufacturing is less than $100,000.
C) Buy the product because the total incremental costs of manufacturing are greater than $100,000.
D) Buy the product because total fixed and variable manufacturing costs are greater than $100,000.
E) Make the product because factory overhead is a sunk cost.

Question

Bannister Co. is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units follows:
$$\begin{array} { | l | r | } 
\hline \text { Direct material } & \$ 45,000 \
\hline \text { Direct labor } & 30,000 \
\hline \text { Factory overhead ( } 30 \% \text { is variable) } & 98,000 \
\hline
\end{array}$$ If Bannister can buy 1,000 units from an outside supplier for $100,000, it should:
A) Make the product because current factory overhead is less than $100,000.
B) Make the product because the cost of direct material plus direct labor of manufacturing is less than $100,000.
C) Buy the product because the total incremental costs of manufacturing are greater than $100,000.
D) Buy the product because total fixed and variable manufacturing costs are greater than $100,000.
E) Make the product because factory overhead is a sunk cost.

Quizplus · Accepted Answer

The total incremental cost of manufacturing includes direct material, direct labor, and variable factory overhead. The variable portion of factory overhead is 30% of $98,000, which is $29,400. Adding direct material ($45,000), direct labor ($30,000), and variable overhead ($29,400) gives a total of $104,400, which is greater than the $100,000 cost of buying the product.

Bannister Co If Bannister Can Buy 1,000 Units from an Outside Supplier