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Agler Corporation currently manufactures a subassembly for its main product

Question:

Agler Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows:

Direct materials $ 1

Direct labor 10

Variable overhead 5

Fixed overhead 8

Total $ 24

Funkhouser Company has contacted Agler with an offer to sell it 4,000 of the subassemblies for $17 each. If Agler buys the subassemblies, $2 of the fixed overhead per unit will be allocated to other products.

Should Agler make or buy the subassemblies?

Incremental Cost:

The incremental cost is the total cost incurred by the company to produce one extra unit of the product. The extra cost incurred to produce may include direct material, direct labor, etc.

Answer and Explanation:

Incremental cost = (Total cost – Fixed overhead per unit) – Offer price

Incremental cost = (24 – 2) – 17

Incremental cost = 22 – 17

Incremental cost = $5

Incremental cost to make 4,000 units = No. of units * Incremental cost

Incremental cost to make 4,000 units = 4,000 * 5

Incremental cost to make 4,000 units = $20,000

Hence, Agler should choose to buy the subassemblies to save $5 per unit.

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