Question

A company currently makes a component used in production. The per unit costs incurred to make the component include: Direct materials: $5; Direct labor: $2; Overhead: $4; Total cost: $11. Twenty-five percent of the overhead costs are considered incremental. The company can purchase the component from another source for $10. The company should do which of the following

Answer 1

Answer: Make Components as it is cheaper by $2 to do so

Explanation:

I see there are no multiple choice options and I could not seem to find any.

However I have a feeling what the answer could be.

It will probably be asking what the company should do. Should it buy the product for $10 or make it itself.

To solve this we would have to calculate the cost of making each unit of the component.

= Direct Labour + Direct Material + Overhead

25% of Overhead is said to be Incremental. This means that 25% of Overhead is the Marginal Cost of production. i.e, the cost per unit.

= 25% * 4

= 1

We would charge $1 per unit to overhead costs.

The total cost per unit is therefore,

= 2 + 5 + 1

= $8

Since it will cost $8 to product the component themselves, they should produce it instead of buy it for $10