Answer:
It is cheaper to make the units in-house. The company will save $207,000.
Explanation:
Giving the following formula:
Production:
Direct materials $ 5.00
Direct labor 9.00
Varaible overhead= 10 - 8= $2
Total fixed overhead= (10*0.8)*69,000= $621,000
Direct materials and direct labor are 100% variable.
Overhead is 80% fixed.
An outside supplier has offered to supply the 69,000 units of RX5 for $19.00 per unit.
I will assume that none of the fixed overhead is avoidable.
<u>First, we need to calculate the incremental cost of making 69,000 units. As it is incremental, we will take into account only the variable costs:</u>
Make in-house:
Total variable cost= 69,000*(5 + 9 + 2)= $1,104,000
<u>Now, the total cost of buying:</u>
Buy:
Total cost= 69,000*19= $1,311,000
It is cheaper to make the units in-house. The company will save $207,000.
