Xia Co. currently buys a component part for $5 per unit. Xia believes that making the part would require $2.25 per unit of direct materials and $1.00 per unit of direct labor. Xia allocates overhead using a predetermined overhead rate of 200% of direct labor cost. Xia estimates an incremental overhead rate of $0.75 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.) 1-b. Should Xia make or buy the part?

Xia Co.

1-a. The relevant costs for Xia Co. to make or buy the part:

Direct materials         $2.25

Direct labor                   1.00

Incremental overhead 0.75

Total relevant cost   $4.00

1-b. Xia should make the part.  It will cost Xia $4.00 to make the component while it costs it $5.00 to buy.  It should therefore, make the component.

Explanation:

a) Data and Calculations:

Price of buying component = $5

Cost of making component:

Direct materials         $2.25

Direct labor                   1.00

Incremental overhead 0.75

Total relevant cost    $4.00

b) The relevant cost for making the component is $4.00.  The overhead cost based on 200% direct labor is not a relevant cost.  It is an allocated fixed cost and must be incurred whatever decision is taken.  By making the component, Xia Co. will be netting in a unit contribution of $1 ($5.00 - $4.00) with the alternative of buying.

if it is for a job, then you should learn everything you can about the job, like what does it involve, what qualification is required and how you are the right person for that job. dress appropriately for the interview. get plenty of rest the night before. good luck!