Question

Direct materials and direct labor are 100% variable. Overhead is 70% fixed. An outside supplier has offered to supply the 70,000 units of RX5 for $20.00 per unit. Required: 1. Determine the total incremental cost of making 70,000 units of RX5. 2. Determine the total incremental cost of buying 70,000 units of RX5. 3. Should the company make or buy RX5

Answer 1

Question Completion:

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

Answer:

Haver Company

1. The total incremental cost of making 70,000 units of RX5 is:

= $1,029,000.

2. The total incremental cost of buying 70,000 units of RX5 is:

= $1,400,000.

3. The company should make RX5.  Buying 70,000 units of RX5 will cost the company $371,000.

Explanation:

a) Data and Calculations:

Variability of costs:                    100%

Direct materials          $4.00     100% = $4.00

Direct labor                   8.00     100% =   8.00

Overhead                     9.00      30% =   2.70

Total costs per unit  $21.00                 $14.70

Fixed cost:

Overhead = $6.30 ($9.00 * 70%)

Offer from an outside supplier to supply 70,000 units of RX5 at $20.00 per unit

Total incremental cost of making 70,000 units of RX5 = $1,029,000 (70,000 * $14.70)

The total incremental cost of buying 70,000 units of RX5 at $20,000 is:

= $1,400,000 (70,000 * $20.00)

Difference = $371,000 ($140,000 - $1,029,000)