Xia Co. currently buys a component part for $7 per unit. Xia believes that makin
ID: 2393980 • Letter: X
Question
Xia Co. currently buys a component part for $7 per unit. Xia believes that making the part would require $4.20 per unit of direct materials and $1.20 per unit of direct labor. Xia allocates overhead using a predetermined overhead rate of 235% of direct labor cost. Xia estimates an incremental overhead rate of $0.60 per unit to make the part. 1-a. What are the relevant costs for Xia to make or buy the part? (Round your answers to 2 decimal places.) Per Unit Make Buy 1-b. Should Xia make or buy the part? O Make ?? BuyExplanation / Answer
Calculation of relevant cost per unit:
Particulars
Amount
Direct Material
4.2
Direct Labor
1.2
Overhead
1.2*235%=2.82
Incremental Overhead
0.60
Total
8.82
Per unit
Make
8.82
Buy
7.00
Xia should Buy the component because relevant cost of buying the product is lower than making the product.
Particulars
Amount
Direct Material
4.2
Direct Labor
1.2
Overhead
1.2*235%=2.82
Incremental Overhead
0.60
Total
8.82
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