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 69,000 units of RX5 follows. Direct materials Direct labor Overhead $ 4.00 8.00 9.00 Total costs per unit $21.00 Direct materials and direct labor are 100% variable. Overhead is 80% fixed. An outside supplier has offered to supply the 69,000 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 otal costs Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

Explanation / Answer

Answer:-

Decision :- The Haver company should purchase units from outside supplier due to lower of both option. The incremental benefit will be $19.20-$19.00= .20 per unit

Total benefit = .20 per unit *69000 units = $13800

The fixed part of overhead ie 20% will not considered for above decision. The overhead cost is totally unavoidable whether purchase from outside supplier or not, it will continue to occur, hence ignored.

Statement of comprative cost Manufaturing Amount Purchase from outside Amount Per unit $ Per unit $ Direct Material         4.00 Purchase Cost        19.00 Direct Labor         8.00 Overhead 9.00*80%         7.20 (Only variable part) Total Manufaturing cost       19.20 Total Purchase cost        19.00

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.