Wheeler Company can produce a product that incurs the following costs per unit: direct materials, $10.10; direct labor, $24.10, and overhead, $16.10. An outside supplier has offered to sell the product to Wheeler for $46.16. If Wheeler buys from the supplier, it will still incur 40% of its overhead cost. Compute the net incremental cost or savings of buying.

net incremental cost of buying is $2.26

Explanation:

Make

Direct materials                           $10.10

Direct labor                                 $24.10

Overhead                                    $16.10

Total                                             50.30

Purchase

Purchase Price                          $46.16

Overhead Cost ($16.10×40%)   $ 6.40

Total                                          $52.56

Conclusion

Purchase Cost ($52.56)>  Make Costs ($50.30)

Therefore  net incremental cost of buying is $2.26 ($52.56-$50.30)

The net incremental cost of buying from the supplier is $2.30 per unit

Explanation:

Cost of producing the product in-house:

Direct materials cost   $10.10

Labor cost                    $24.10

Overhead                     $16.10

Total cost                     $50.30

Cost of purchasing externally is computed thus:

Purchase price                                           $46.16

unavoidable overhead cost(40%*$16.10)  $6.44

Total cost                                                      $52.6

By buying externally from the supplier,Wheeler company would incur additional cost of $2.30($52.6-$50.3) on every unit purchased from the supplier.

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