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

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.

Correct Answer:

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