Question

Wheeler Company can produce a product that incurs the following costs per unit: direct materials, $9.10; direct labor, $23.10, and overhead, $15.10. An outside supplier has offered to sell the product to Wheeler for $42.56.

If Wheeler buys from the supplier, it will still incur 40% of its overhead cost.Compute the net incremental cost or savings of buying. Select:a. $3.75 savings per unit.b. $3.75 cost per unit.c. $1.30 cost per unit.d. $4.32 cost per unit.$1.30 savings per unit.

Answer 1

c. $1.30 cost per unit.

Step-by-step explanation:

Wheeler Company

Total Cost per unit if Wheeler Company produce a product:

Total Cost = Direct Material + Direct Labor + Overhead

Total Cost = $9.10 + $23.10 + $15.10

Total Cost = $47.30 cost per unit --------------Option 1

Total Cost per unit if a product is purchased from outside supplier:

Total Cost = Purchase Price + 40% of Overhead Cost

Total Cost = $42.56 + ($15.10 x 0.40)

Total Cost = $42.56 + $6.04

Total Cost = $48.60 cost per unit --------------Option 2

Now we can calculate the Net Incremental Cost or Savings of buying as follows:

Net Incremental Cost = Option 2 - Option 1

Net Incremental Cost = $48.60 - $47.30

Net Incremental Cost = $1.30 cost per unit