Question

Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 61,000 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 61,000 units of RX5 for $19.00 per unit.



Required:

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
Total direct labor 488,000
Variable overhead costs 109,800
Cost to buy the units
Total costs $841,800
Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

Answer 1

Answer:

It is more convenient to produce in house.

Explanation:

Giving the following information:

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. The overhead is 80% fixed. An outside supplier has offered to supply the 61,000 units of RX5 for $19.00 per unit.

The fixed costs are unavoidable, therefore we will concentrate the analysis in the variable costs.

Make in house:

Unitary cost= 4 + 8 + (9*0.20)= $13.8

Buy= 19

Difference= 19 - 13.8= 5.2

It is more convenient to produce in house.