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 Axle for $32. Compute the net incremental cost or savings of buying the component.
A) $5.00 savings per unit.
B) $0 cost or savings per unit.
C) $3.00 cost per unit.
D) $5.00 cost per unit.
E) $3.00 savings per unit.

Question

Quizplus · Accepted Answer

The cost per unit for producing the component in-house is $35 ($10 + $14 + $3 + $8). If the outside supplier offers to sell the same component for $32, the net incremental cost or savings of buying the component would be $-3 ($32 - $35). Therefore, it would cost $3 more per unit to buy the component from the outside supplier, making answer D the correct choice.

Paxton Company Can Produce a Component of Its Product That