tnter cengtoy Haver Company currenty produces component RXS

tnter cengtoy Haver Company currenty produces component RXS for ts sole product. The current cost per unit to manufacture the required 52.000 units of RX5 follows Direct materials Direct labor Overhead s 5.00 9.00 10.00 Total costa per unit24.00 Direct materials and direct labor are 100% variable. Overhead is 80% fixed. An outside supplier has offered to supply the 52,000 units of RX5 for $18.00 per unit. Required: 1. Calculate the incremental costs of making and buying component RX5 Total incremental costs of: Making theunits Buying the units · . Total costs Should the company continue to manufacture the part, o should it buy the part from the outside supplier?

Solution

Total incremental costs of Making Buying Direct materials 5 0 Direct labor 9 0 Overheads = 10*20% 2 0 Purchase price 18 Total relevant costs 16 18 Since the cost of making the units inhouse is less than buying the components, it is preferable to make the component rather than buying it NOTE THAT FIXED OVERHEADS ARE INCURRED IRRESPECTIVE OF THE DECISION AND HENCE THEY ARE CONSIDERED IRRELEVANT