Question

Wheeler Company can produce a product that incurs the following costs per unit: direct materials, $10.30; direct labor, $24.30, and overhead, $16.30. An outside supplier has offered to sell the product to Wheeler for $46.88. If Wheeler buys from the supplier, it will still incur 40% of its overhead cost. Compute the net incremental cost or savings of buying.

Answer 1

Incremental cost of buying = $2.50

Explanation:

Cost per unit;

Direct materials = $10.30

Direct labor = $24.30

Overhead = $16.30

Total Overhead cost = 10.30 + 24.30 + 16.30

= $50.90

Where the item is purchased,

Total cost = $46.88 + (40% × 16.30)

= $46.88 + $6.52

= $53.40

Cost difference = $53.40 - $50.90

= $2.50

There is an incremental cost of buying. This amounts to $2.50