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

Question

Haver Company currently produces component RX5 for its sole product. The equipment that is used to produce RX5 must be replaced, and management must decide whether to replace the equipment or buy RX5 from an outside supplier. The current cost per unit to manufacture the required 59,000 units of RX5 follows.

Direct materials and direct labor are 100% variable. Overhead is 60% fixed, and the current fixed overhead includes $0.50 per unit depreciation on the old equipment. If management buys the new equipment, it will incur depreciation of $1.62 per unit. An outside supplier has offered to supply the 59,000 units of RX5 for $18.00 per unit.

Calculate the incremental costs of making and buying component RX5.

Haver Company currently produces component RX5 for its sole product. The equipment that is used to produce RX5 must be replaced, and management must decide whether to replace the equipment or buy RX5 from an outside supplier. The current cost per unit to manufacture the required 59,000 units of RX5 follows.

  

Explanation / Answer

Incremental Cost to Make = $23.12 Additional depreciation = $1.62 - $0.50 = $1.12 Total cost/unit + additional depreciation = $22.00 + $1.12
Incremental Cost to Buy = $24.52 Fixed Overhead = $9.00 * 60% = $5.40 + additional depreciation $1.12 = $6.52 + $18.00/unit cost = $24.52
The company should MAKE the component.

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