Question

Direct material $ 8.40 Direct labor 24.40 Overhead 42.00 Total product costs per unit $ 74.80 An outside supplier offers to provide Epsilon with all the units it needs at $66.20 per unit. If Epsilon buys from the supplier, the company will still incur 30% of its overhead. Epsilon should choose to:

Answer 1

Epsilon should make the product instead of buying it

Explanation:

Direct material = $8.4

Direct labor = $24.4

Overhead = $42

Relevant cost = $8.4 + $24.4 + ($42x70%)

Relevant cost = $8.4 + $24.4 +$29.4

Relevant cost = $62.2

Cost to make = $62.2

Cost to buy = $66.2

Difference = $4

Epsilon should make this product instead of buying it from another supplier

because the cost to make the product is much lower than buying it.