Haver Company currently produces component RX5 for its sole

Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 56,00 units of RX5 follows. Direct materials Direct labor Overhead 5.00 10.00 24.00 Total costs per unit Direct materials and direct labor are 100% variable. Overhead is 70% fixed. An outside supplier has offered to supply the 55,000 units of RX5 for $19.00 per unit. Required 1. Calculate the incremental costs of making and buying component RX5 Total incremental costs of: Making the units Buying the units Total costs Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

Solution

Calculate incremental cost :

Company should continue to manufacture the part

Total incremental costs of	Making the units	Buying the units
Direct material	280000
Direct labour	504000
Variable overhead (56000*10*30%)	168000
Purchase cost (56000*19)		1064000
Total cost	952000	1064000