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

question 139

Multiple Choice

Bannister Co. is thinking about having one of its products manufactured by an outside supplier. Currently, the cost of manufacturing 1,000 units follows: $\begin{array} { l r } \text { Direct material } & \$ 45,000 \\\text { Direct labor } & 30,000 \\\text { Factory overhead (30\% is variable) } & 98,000\end{array}$
If Bannister can buy 1,000 units from an outside supplier for $100,000, it should:

• A) Buy the product because the total incremental costs of manufacturing are greater than $100,000.
• B) Buy the product because total fixed and variable manufacturing costs are greater than $100,000.
• C) Make the product because current factory overhead is less than $100,000.
• D) Make the product because the cost of direct material plus direct labor of manufacturing is less than $100,000.
• E) Make the product because factory overhead is a sunk cost.

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Definitions:

Flotation Cost

The total costs that a company incurs when it issues new securities, including underwriting, legal, and registration fees.

Annual Dividend

The total amount of dividends a company pays to its shareholders in one year, usually presented on a per share basis.

WACC

Weighted Average Cost of Capital; a calculation of a company's cost of capital in which each category of capital is proportionately weighted.

Corporate WACC

The weighted average cost of capital for a corporation, reflecting the cost of its equity and debt financing.