Beta Company currently makes 350,000 units of product, Gamma along with its othe

Question

Beta Company currently makes 350,000 units of product, Gamma along with its other products. Its production costs per unit are: direct materials, $5; direct labor, $4; unit- related overhead, $2. Facility-sustaining overhead is $700,000 per year. A company has made Beta an offer to supply all the units of Gamma it needs for $12 per unit. Should Beta Company accept the supplier’s offer?

a. No, it will lose $1 per unit

b. Yes, it will save $1 per unit

c. Yes, it will save $3 per unit

d. No, it will lose $3 per unit

e. none of the above

Explanation / Answer

No. Beta Company should not accept the supplier's offer.

The supplier is offering the units of Gamma required at $ 12 per unit, as compared to the in-house cost of production thereof aggregating $ 11 ($5 + $4 + $2). Thus, by accepting the offer, Beta Company stands to lose $1 per unit.

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