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Our company can produce a component of its product that incurs the following costs per unit: direct materials, $10; direct labor, $14, variable overhead $3 and fixed overhead, $8
Our company can produce a component of its product that incurs the following costs per unit: direct materials, $10; direct labor, $14, variable overhead $3 and fixed overhead, $8. An outside supplier has offered to sell the product to us for $32. Compute the net incremental cost or savings of buying the component
a) $5.00 savings per unit.
b) $3.00 cost per unit.
c) $0 cost or savings, unit.
d) 85.00 cost per unit.
e) $3.00 savings per ,unit.
Expert Solution
Answer
Net incremental cost of buying= $5 cost per unit
Explanation
Relevant cost to make = Direct material+ Direct labor+ Variable overhead
= 10+14+3 = $27
Net incremental cost of buying = Relevant cost- Selling cost
= 27-32
= $5 cost per unit
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