Question

Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 65,000 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 80% fixed. An outside supplier has offered to supply the 65,000 units of RX5 for $18.00 per unit. Required: 1. Determine the total incremental cost of making 65,000 units of RX5. 2. Determine the total incremental cost of buying 65,000 units of RX5. 3. Should the company make or buy RX5

Answer 1

1. The total incremental cost of making 65,000 units of RX5

Total Direct Material + Total direct Labour + Variable Overhead cost

Total Direct Material = 65,000 units * $5 = $325,000

Total Direct Labour = 65,000 units * $9 = $585,000

Variable Overhead cost = $65,000 * 10 = $650,000. $650,000 *(1- 80%) = $650,000 *20% = $130,000

Hence, The total incremental cost of making = $325,000 + $585,000 + $130,000 = $1,040,000

2. The total incremental cost of buying 65,000 units of RX5 =

The cost to buy the units = 65,000 units * $18 = $1,170,000

3. The company should be making the RX5 because the total cost of making the 65,000 unit of RX5 is lesser than cost of buying the 65,000 units of RX5