Xia Co currently buys a component part for 5 per unit Xia be

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 $1.05 per unit of direct labor. Xia allocates overhead using a predetermined overhead rate of 205% of direct labor cost. Xia estimates an incremental overhead rate of $0.70 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 O Buy

Solution

1a) Calculate relevant cost per unit

Make per unit = 4.00

Buy per unit = 5.00

1b) Xia should make the part

	Make	Buy
Direct material	2.25
Direct labour	1.05
Overhead	0.70
Purchase cost		5.00
Total relevant cost per unit	4.00	5.00