Question

Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 68,000 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 68,000 units of RX5 for $20.00 per unit. Required: 1. Determine the total incremental cost of making 68,000 units of RX5. 2. Determine the total incremental cost of buying 68,000 units of RX5. 3. Should the company make or buy RX5

Answer 1

1.Total cost of making = $1,632,000.

2) Incremental cost of buying $204,000

3.)The company should make the product as it will save $204,000 by doing so

Step-by-step explanation:

1) Total cost of making = unit cost× units required cost

Total cost of making = 24.00 × 68,000= 1,632,000.0

2) Total incremental cost of buying

Relevant cost of making

Unit variable cost= (5.00 + 9.00+ (30%× 10)=17

Total variable cost of making = 17 ×68,000 = 1,156,000

Relevant cost of buying 68,000× 20 = 1,360,000

Incremental cost of buying 204,000

3) Haver should make the product as it will save $204,000 by doing so