Question

Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials, $10; direct labor, $14, variable overhead $3 and fixed overhead, $8. An outside supplier has offered to sell the product to Paxton for $32. Compute the net incremental cost or savings of buying the component.

A. $5.00 savings per unit. eBook
B. $3.00 cost per unit.
C. $0 cost or savings per unit.
D. $5.00 cost per unit.
E. $3.00 savings per unit.

Answer 1

D. $5.00 cost per unit.

Step-by-step explanation:

The computation of the incremental cost or saving of purchasing the component is shown below;

Selling price = $32

And, the making cost is

= Direct material + direct labor + variable overhead

= $10 + $14 + $3

= $27

So, the net incremental cost is

= Selling price - making cost

= $32 - $27

= $5 cost per unit

Hence, the correct option is d.