Question

Xia Co. currently buys a component part for $10 per unit. Xia believes that making the part would require $7.20 per unit of direct materials and $1.05 per unit of direct labor. Xia allocates overhead using a predetermined overhead rate of 245% of direct labor cost. Xia estimates an incremental overhead rate of $0.75 per unit to make the part.

What are the relevant costs for Xia to make or buy the part? (Round your answers to 2 decimal places.) Should Xia make or buy the part?

Answer 1

Xia should make the part because it would be more cost-effective compared to buying the part.

Step-by-step explanation:

The relevant costs for Xia to make or buy the part include the direct materials, direct labor, overhead, and incremental overhead. Xia believes that making the part would require $7.20 per unit of direct materials, $1.05 per unit of direct labor, and an incremental overhead rate of $0.75 per unit. To calculate the overhead cost, Xia uses a predetermined overhead rate of 245% of direct labor cost.

Therefore, the relevant costs for Xia to make the part would be -

$7.20 (direct materials) + $1.05 (direct labor) + (245% * $1.05) (overhead) + $0.75 (incremental overhead). On the other hand, if Xia were to buy the part, the relevant cost would be $10 per unit.

Comparing the relevant costs, Xia should make the part if the cost of making is lower than the cost of buying. In this case, the cost of making the part is $9.508125 (rounded to 2 decimal places) per unit, while the cost of buying the part is $10 per unit. Therefore, Xia should make the part, as it would be more cost-effective.

Answer 2

It is more convenient to buy the component.

Step-by-step explanation:

Giving the following information:

Xia Co. currently buys a part for $10 per unit. Xia believes that making the part would require $7.20 per unit of direct materials and $1.05 per unit of direct labor. Xia allocates overhead using a predetermined overhead rate of 245% of direct labor cost. Xia estimates an incremental overhead rate of $0.75 per unit to make the part.

Relevant costs are those that change whether a decision is made or not.

Relevant costs: direct material, direct labor, manufacturing overhead

To determine whether Xia should make the component or not, we need to calculate the unitary cost of production.

Production costs= 7.20 + 1.05 + (1.05*2.45 + 0.75)= $11.57

It is more convenient to buy the component.