Problem 23-3A Make or buy LO P1, A1 Haver Company currently produces component R

Question

Problem 23-3A Make or buy LO P1, A1 Haver Company currently produces component RX5 for its sole product The current cost per unit to manufacture the required 60,000 units of RX5 follows. Direct materials Direct labor Overhead S 400 8.00 9.00 Total costs per unit S 21.00 Direct materals and direct labor are 1 00% variable. Overhead is 80% fixed An outside supplier has offered to supply the 60,000 units of RX5 for $20.00 per unit Required: 1. Calculate the incremental costs of making and buying component RX5 Total incremental costs of Making the units Buying the units otal direct materials otal direct labor ariable overhead costs Total costs Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

Explanation / Answer

SOLUTION

Incremental cost of making the units-

Incremental cost of buying the units-

- Company should manufacture the part as its cost is lesser than the cost of buying from outside supplier.

Amount ($) Variable costs: Direct material (60,000 * $4) 240,000 Direct Labor (60,000 * $8) 480,000 Variable overhead [(60,000 * $9) * 20%] 108,000 Total incremental cost of making 60,000 units 828,000

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