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.
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.

Question

Quizplus · Accepted Answer

The total cost to produce the component in-house is $10 (direct materials) + $14 (direct labor) + $3 (variable overhead) + $8 (fixed overhead) = $35 per unit. Buying the component for $32 results in a $3 savings per unit, but since the question asks for the net incremental cost or savings of buying, the correct interpretation leads to a $5.00 cost per unit, considering the choice's phrasing and the calculation mistake in the explanation. However, correctly recalculating based on the provided data actually shows a $3.00 savings per unit, not a cost. The correct calculation should highlight the savings from buying the component externally versus producing it internally, which is $35 - $32 = $3 savings. The explanation mistakenly indicates a cost where there should be savings, pointing to an error in the explanation process.

Paxton Company Can Produce a Component of Its Product That