Question

Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 50,000 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 70% fixed. An outside supplier has offered to supply the 50,000 units of RX5 for $19.00 per unit. Required: 1. Calculate the incremental costs of making and buying component RX5.

Answer 1

Answer:

The incremental costs of making and buying component RX5 is $100,000

Explanation:

For computing the increment cost of making and buying component RX5, first we have to compute the cost of making and buying component RX5 separately.

Cost of making includes:

Direct Material = 50,000 × $5 = $250,000

Direct Labor = 50,000 × 9 = $450,000

Variable Overhead cost = 50,000 × 10 × 30% = $150,000

So, total cost of making = Direct material cost + direct labor cost + variable overhead cost

= $250,000 + $450,000 + $150,000

= $850,000

Now, the cost of buying component is equals to

=  units × RX5 per unit

= 50,000 × $19

= $950,000

So, the incremental costs of making and buying component RX5 is equals to

= cost of making - cost of buying component

= $950,000 - $850,000

= $100,000

Hence,  the incremental costs of making and buying component RX5 is $100,000