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Aleks04 [339]
2 years ago
8

Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials, $9.50; direct

labor, $13.50, variable overhead $2.50 and fixed overhead, $7.50. An outside supplier has offered to sell the product to Paxton for $33.00. Compute the net incremental cost or savings of buying the component.
Business
1 answer:
mrs_skeptik [129]2 years ago
4 0

Answer:

$7.50 per unit

Explanation:

Cost of buying from outside supplier = $33 per unit.

Relevant cost of making such component in-house = Direct materials+ Direct labor+ Variable overhead

= $9.50 per unit + $13.50 per unit + $2.50 per unit

= $25.50 per unit

Net incremental cost of buying the component = Cost of buying from outside supplier- Relevant cost of making such component in-house

= $33.00 per unit - $25.50 per unit

= $7.50 per unit

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Where D = Annual demand, Co = Ordering cost per order and H = holding cost per item per annum.

For 25 Order Size

Total cost = 1,220 x $26/25  + 25 x $25/2

Total cost = $1,268.80 + $312.50 = $1,581.30

For 40 Order Size

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For 60 Order Size

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Explanation:

In this case, we need to determine the total costs based on different order sizes. Thus, economic order quantity is the order size that minimises the total cost.

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3 years ago
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