Answer:
It is cheaper to buy the product than producing it.
Explanation:
Giving the following information:
The current cost per unit to manufacture the required 50,000 units of RX5 follows. Direct materials $ 5.00 Direct labor 8.00 Overhead 9.00 Total costs per unit $ 22.00 Direct materials and direct labor are 100% variable. The Overhead is 80% fixed. An outside supplier has offered to supply the 50,000 units of RX5 for $18.00 per unit.
First, we need to calculate the total cost of making the product:
The total cost of producing 50,000 units:
Direct material= 50,000*5= 250,000
Direct labor= 50,000*8= 400,000
Total overhead= 50,000*9= 450,000
Total cost= 1,100,000
Total cost of purchasing:
Buying= 50,000*18= 900,000
Unavoidable overhead= 50,000*(9*0.2)= 90,000
Total cost= 990,000
It is cheaper to buy the product than producing it.
