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

question 145

Multiple Choice

Bannister Co.is thinking about having one of its products manufactured by a subcontractor. Currently,the cost of manufacturing 1,000 units is:
$$\begin{array}{l}\begin{array} { l l r } \text {Direct material }&\$45,000\\\text {Direct labor }&30,000\\\text {Factory ov erhead (30 \% is variable) }&98,000\end{array}\end{array}$$ 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.

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Definitions:

Income Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in consumers' income, expressed as a percentage change in demand divided by the percentage change in income.

Inferior Good

is a type of good whose demand decreases when consumer income rises, unlike normal goods, for which demand increases when income rises.

Supply Curve

A graphical representation showing the relationship between the price of a good or service and the quantity of that good or service that a supplier is willing and able to supply at various prices.

Price Elasticity of Supply

A measure of how much the quantity supplied of a good changes in response to a change in its price.