Question

Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 50,000 units of RX5 follows. Direct materials $ 5.00 Direct labor 8.00 Overhead 9.00 Total costs per unit $ 22.00 Direct materials and direct labor are 100% variable. Overhead is 80% fixed. An outside supplier has offered to supply the 50,000 units of RX5 for $18.00 per unit. Required: 1. Calculate the incremental costs of making and buying component RX5.

Answer 1

It is cheaper to buy the product than producing it.

Step-by-step explanation:

Giving the following information:

The current cost per unit to manufacture the required 50,000 units of RX5 follows. Direct materials $ 5.00 Direct labor 8.00 Overhead 9.00 Total costs per unit $ 22.00 Direct materials and direct labor are 100% variable. The Overhead is 80% fixed. An outside supplier has offered to supply the 50,000 units of RX5 for $18.00 per unit.

First, we need to calculate the total cost of making the product:

The total cost of producing 50,000 units:

Direct material= 50,000*5= 250,000

Direct labor= 50,000*8= 400,000

Total overhead= 50,000*9= 450,000

Total cost= 1,100,000

Total cost of purchasing:

Buying= 50,000*18= 900,000

Unavoidable overhead= 50,000*(9*0.2)= 90,000

Total cost= 990,000

It is cheaper to buy the product than producing it.