Question

Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 69,000 units of RX5 follows.

Direct materials	$	5.00
Direct labor		9.00
Overhead		10.00
Total costs per unit		24.00

Direct materials and direct labor are 100% variable. Overhead is 70% fixed. An outside supplier has offered to supply the 69,000 units of RX5 for $20.00 per unit.

Required:
1. Calculate the incremental costs of making and buying component RX5.

Answer 1

Total incremental costs of:	Making the units	Buying the units
Total direct materials [69000*$5]	$345,000
Total direct labor [69000 units*$9]	621,000
*Variable overhead costs [69000 units*$10*30%]	207,000
Cost to buy the units [69000*$20]		1,380,000
Total costs	$1,173,000	$1,380,000
*Variabe Overhead = totalOverhead- Fixed Overhead = 100%-70% = 30% of total overhead
ITS Better to make the unit rather than purchasing it from outside market, since it result in lower cost