Question

Wheeler Company can produce a product that incurs the following costs per unit: direct materials, $10.10; direct labor, $24.10, and overhead, $16.10. An outside supplier has offered to sell the product to Wheeler for $46.16. 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

net incremental cost of buying is $2.26

Step-by-step explanation:

Make

Direct materials $10.10

Direct labor $24.10

Overhead $16.10

Total 50.30

Purchase

Purchase Price $46.16

Overhead Cost ($16.10×40%) $ 6.40

Total $52.56

Conclusion

Purchase Cost ($52.56)> Make Costs ($50.30)

Therefore net incremental cost of buying is $2.26 ($52.56-$50.30)

Answer 2

The net incremental cost of buying from the supplier is $2.30 per unit

Step-by-step explanation:

Cost of producing the product in-house:

Direct materials cost $10.10

Labor cost $24.10

Overhead $16.10

Total cost $50.30

Cost of purchasing externally is computed thus:

Purchase price $46.16

unavoidable overhead cost(40%*$16.10) $6.44

Total cost $52.6

By buying externally from the supplier,Wheeler company would incur additional cost of $2.30($52.6-$50.3) on every unit purchased from the supplier.