Question

# Haver Company currently produces component RX5 for its sole product. The current cost per unit to...

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?

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.

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