Question

Wheeler Company can produce a product that incurs the following costs per unit: direct materials, $9.90; direct labor, $23.90, and overhead, $15.90. An outside supplier has offered to sell the product to Wheeler for $45.44. 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 = $2.1 per unit

Explanation:

$/unit

Relevant variable cost of production

= 9.90 + 23.90 + (60%*15.90)= 43.34

External purchase price 45.44

Net incremental cost of buying 2.1

Note the only 60% of the overhead are relevant, the balance of 40% would still be incurred whether the the product is produced internally or purchased from outside

Net incremental cost of buying = $2.1 per unit

Answer 2

$2.1 per unit

Step-by-step explanation:

The total cost per unit would be

= Direct materials per unit + direct labor per unit + overhead cost per unit

= 9.90+23.90+15.90

= $49.7

Purchase price + overhead cost

=45.44 + 15.90 x 40%

= $51.8

The difference would be

= $51.8 - $49.7

= $2.1

The difference between both values is the net incremental cost or savings of buying.