Wheeler Company can produce a product that incurs the following costs per unit: direct materials, $10; direct labor, $24, and overhead, $16. An outside supplier has offered to sell the product to Axle for $45. If Wheeler buys from the supplier, it will still incur 45% of its overhead cost. Compute the net incremental cost or savings of buying.

$2.20

Explanation:

Given that,

Direct materials = $10

Direct labor = $24

Overhead = $16

Outside supplier has offered to sell the product to Axle = $45

If Wheeler buys from the supplier, it will still incur 45% of its overhead cost.

Buying cost:

= Offered price + (45% of overhead cost)

= $45 + ($16 × 0.45)

= $45 + $7.2

= $52.2

Net incremental cost:

= Buying cost - Production cost

= $52.2 - (Direct materials + Direct labor + Overhead)

= $52.2 - ($10 + $24 + $16)

= $52.2 - $50

= $2.20

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