Question

Xia Co. currently buys a component part for $10 per unit. Xia believes that making the part would require $7.20 per unit of direct materials and $1.05 per unit of direct labor. Xia allocates overhead using a predetermined overhead rate of 245% of direct labor cost. Xia estimates an incremental overhead rate of $0.75 per unit to make the part.
What are the relevant costs for Xia to make or buy the part? (Round your answers to 2 decimal places.) Should Xia make or buy the part?

Answer 1

Answer:

It is more convenient to buy the component.

Explanation:

Giving the following information:

Xia Co. currently buys a part for $10 per unit. Xia believes that making the part would require $7.20 per unit of direct materials and $1.05 per unit of direct labor. Xia allocates overhead using a predetermined overhead rate of 245% of direct labor cost. Xia estimates an incremental overhead rate of $0.75 per unit to make the part.

Relevant costs are those that change whether a decision is made or not.

Relevant costs: direct material, direct labor, manufacturing overhead

To determine whether Xia should make the component or not, we need to calculate the unitary cost of production.

Production costs= 7.20 + 1.05 + (1.05*2.45 + 0.75)= $11.57

It is more convenient to buy the component.