Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials, $9.50; direct labor, $13.50, variable overhead $2.50 and fixed overhead, $7.50. An outside supplier has offered to sell the product to Paxton for $33.00. Compute the net incremental cost or savings of buying the component.
Answer-The net incremental cost of buying the component= $7.50 per unit.
Explanation- Cost of buying from outside supplier = $33 per unit.
Relevant cost of making such component in-house = Direct materials+ Direct labor+ Variable overhead
= $9.50 per unit+$13.50 per unit+$2.50 per unit
= $25.50 per unit
Net incremental cost of buying the component = Cost of buying from outside supplier- Relevant cost of making such component in-house
= $33.00 per unit-$25.50 per unit
= $7.50 per unit
The unavoidable fixed cost have no effect on decision making, these cost are continue to occur whether product are manufactured or purchased.
Paxton Company can produce a component of its product that incurs the following costs per unit:...