Axle 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 Axle buys from the supplier, it will still incur 45% of its overhead cost. Compute the net incremental cost or savings of buying.

Question

Quizplus · Accepted Answer

The total cost per unit for Axle Company is $50 (adding direct materials, direct labor and overhead). If Axle buys the product from the supplier, it incurs 45% of its overhead cost, which is $7.20. Therefore, the total cost per unit would be $45 + $7.20 = $52.20. 
The net incremental cost or savings of buying would be: 
$50 - $52.20 = -$2.20 (cost per unit)
Therefore, the best choice is C, indicating that buying from the supplier would cost Axle an additional $2.20 per unit.

Axle Company Can Produce a Product That Incurs the Following