Haver Company currently produces component RX5 for its sole product. The current

Question

Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 67,000 units of RX5 follows.

Direct materials and direct labor are 100% variable. Overhead is 80% fixed. An outside supplier has offered to supply the 67,000 units of RX5 for $19.00 per unit.

Calculate the incremental costs of making and buying component RX5.

Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 67,000 units of RX5 follows.

Explanation / Answer

Per unit cost of each component = $ 19

The Incremental cost of buying the component = 67000 x 19 = $1273000

The Incremental cost of Making

Overhead is 20% variable = VAriable overhead cost per unit = 10x20% = $2

units produced = 67000

Variable overhead = 67000x2 = $134000

Direct material = 67000x5 = $335000

Direct labour = 67000x9 = $603000 (Since both direct material and direct labour are 100% variable)

Total Incremental cost of making = 134000+335000+603000 = $1072000

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