Question

Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 62,000 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 62,000 units of RX5 for $20.00 per unit.

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

Total Incremental Costs of:	Making the Units	Buying the Units
Total Costs
Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

Answer 1

Answer:

The incremental costs of making and buying component RX5 is $186,000

Explanation:

Cost of making computation :

Direct Material = 62,000 × $5 = $310,000

Direct Labor = 62,000 × 9 = $558,000

Variable Overhead cost = 62,000 × 10 × 30% = $186,000

Note: We will consider variable overhead only because 70% fixed is for both making and buying the part.

So, total cost of making = Direct material cost + direct labor cost + variable overhead cost

= $310,000 + $558,000 + $186,000

= $1,054,000

Now, the cost of buying component is equals to

= units × RX5 per unit

= 62,000 × $20

= $1,240,000

So, the incremental costs of making and buying component RX5 =

= cost of buying - cost of making

= $1,240,000 - $1,054,000

= $186,000

Company should continue to manufacture the part becuase there will be incremental cost of $186,000.