Haver Company currently produces components RX5 for its sole product. The curren
ID: 2450201 • Letter: H
Question
Haver Company currently produces components RX5 for its sole product. The current cost per unit to manufacture the required 50,000 units of RX5 follows:
direct material $ 5.00
direct labot $ 8.00
Overhead 9.00
Total cost per unit $ 22.00
Direct materials and direct labor are 100% variable. Overhead is 80% fixed. An outside supplier has offered to supply the RX5 for $18.00 per unit.
a) Determine whether the company should make or buy the RX5
b) what factors besides cost must managment consider when deciding whether to make it or buy the RX5
Explanation / Answer
a) manufacture the required 50,000 units of RX5 follows
Direct material $ 5.00
Direct labot $ 8.00
Overhead $9.00
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Total cost per unit $ 22.00
Out of this variable expenses is material $ 5.00 +$ 8.00 Direct labor )=$13 +$1.80=$14.80
Overhead 9*20/100=$1.80 is considered as variable
Overhead cost is $9 *80/100=7.20 is fixed
So product to make is 50,000 units * $22=$1,100,000
To buy from the supplier = 50,000 units * $18.00 per unit.=$900,000
Recommended to Buy the product from outside supplier
if the product can bought, the company can earned income by $200,000($1,100,000 - $900,000)
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b) The company want to see the product to give the profit or not, buy or make which giving low expenses to do the product, we can select that options. In this case Buy options is low expense than the making.
Apart from the cost, Can check with quality of the product and duration for making the product.
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