Wheeler Company can produce a product that incurs the following costs per unit: direct materials,$10;direct labor,$24,and overhead,$16.An outside supplier has offered to sell the product to Axle for $45.If Wheeler buys from the supplier,it will still incur 45% of its overhead cost.Compute the net incremental cost or savings of buying.
A)$4.00 savings per unit.
B)$4.00 cost per unit.
C)$2.20 cost per unit.
D)$3.80 cost per unit.
E)$2.20 savings per unit.

Question

Quizplus · Accepted Answer

Wheeler's total cost per unit = $10 (direct materials) + $24 (direct labor) + $16 (overhead) = $50 per unit.

If Wheeler buys from the supplier, it will still incur 45% of its overhead cost, which is $16 * 0.45 = $7.20 per unit.

Therefore, the total cost for Wheeler if it buys from the supplier would be $10 (direct materials) + $24 (direct labor) + $7.20 (overhead) + $45 (purchase cost from supplier) = $86.20 per unit.

The net incremental cost or savings of buying from the supplier is the difference between the total cost for Wheeler and the purchase cost from the supplier.

Net incremental cost or savings = $86.20 - $45 = $41.20

Since the question is asking for the cost or savings per unit, we need to divide the net incremental cost or savings by the number of units.

Net incremental cost or savings per unit = $41.20 / 1 unit = $41.20

Since the purchase cost from the supplier is higher than the cost for Wheeler to produce it, there is a cost per unit for Wheeler to buy from the supplier.

$45 - $50 - $7.20 = -$12.20

But the question is asking for the net incremental cost or savings if Wheeler buys from the supplier.

Net Incremental Cost or Savings = Total cost for Wheeler - Purchase cost from supplier

= $50 + $16(0.45) - $45

= $22

Since the Net Incremental Cost or Savings is positive, this implies that there are savings if Wheeler buys the product from the supplier.

Net incremental cost or savings per unit = $22 / 1 unit = $22

Therefore, the best choice is C, $2.20 cost per unit.

Wheeler Company Can Produce a Product That Incurs the Following