Question

Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 70,000 units of RX5 follows.
Direct materials $ 4.00
Direct labor 8.00
Overhead 9.00
Total costs per unit 21.00
Direct materials and direct labor are 100% variable. Overhead is 80% fixed. An outside supplier has offered to supply the 70,000 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 direct materials $ 244,000 $ 0
Total direct labor 488,000 0
Variable overhead costs 122,000 0
Cost to buy the units 1,159,000
Total costs $ 854,000 $ 1,159,000
Should the company continue to manufacture the part,
or should it buy the part from the outside supplier? Make the units

Answer 1

Answer:

1.Incremental cost of making and buying the RX5 is $434,000

2. Since the cost of buying is more than the cost of producing by $305,000, therefore, the company should continue to produce the component parts.

Explanation:

1.We need to first compute the cost of making the component part.

Cost of making are;

Direct material = 70,000 units × $4

= $280,000

Direct labor = $70,000 units × $8

= $560,000

Variable over head cost = 70,000 units × $9 × 20%

= $126,000

Therefore, total cost of making the components = direct material cost + direct labor cost + variable overhead cost

= $280,000 + $560,000 + $126,000

= $966,000

Also, total cost of buying the components

= Units × RX5 per unit

= 70,000 × $20

= $1,400,000

Therefore,

Incremental cost = Cost of making - Cost of buying

= $966,000 - $1,400,000

=$434,000

2. Total costs of making the units = Total direct material cost + Total direct labor costs + Variable overhead costs

= $244,000 + 488,000 + $122,000

= $854,000

Since total cost to buy is $1,159,000

Total incremental cost = Total cost of making the units - Total cost of buying the units

= $854,000 - $1,159,000

= $305,000