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16 January, 11:03

Factor Co. can produce a unit of product for the following costs: Direct material $ 7.80 Direct labor 23.80 Overhead 39.00 Total product cost per unit $ 70.60 An outside supplier offers to provide Factor with all the units it needs at $45.20 per unit. If Factor buys from the supplier, the company will still incur 60% of its overhead. Factor should choose to:

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  1. 16 January, 11:10
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    Buying option

    Explanation:

    In this question we compare the buying cost and the making cost

    The buying cost comprise of

    = Direct material per unit + Direct labor per unit + overhead per unit * remaining percentage

    = $7.80 + $23.80 + $39 * 40%

    = $7.80 + $23.80 + $15.60

    = $47.20

    And, the buying cost is $45.20

    Based on these two cost, the Factor should use the buying cost as it is less than the making cost
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