Question

Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials, $10.30; direct labor, $14.30, variable overhead $3.30 and fixed overhead, $8.30. An outside supplier has offered to sell the product to Paxton for $36.20. Compute the net incremental cost or savings of buying the component.

Answer 1

Answer:

-$8.30 per unit

Explanation:

The computation of the net incremental cost or savings of buying the component is shown below:

Total making cost is

= $10.30 + $14.30 + $3.30 + $8.30

= $36.20

And, the relevant cost is

= $36.20 - $8.30

= $27.90

So, the increment cost for purchasing a component is

= $27.90 - $36.20

= -$8.30 per unit

The same is to be considered