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?

Question

Business

Alejandra Hester

17 January, 13:15

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?

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Answers (1)

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Alfredo Chandler · Answer 1

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.