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15 April, 05:29

Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 61,000 units of RX5 follows.

Direct materials $ 4.00

Direct labor 8.00

Overhead 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 61,000 units of RX5 for $19.00 per unit.

Required:

Calculate the incremental costs of making and buying component RX5.

Total incremental costs of: Making the units Buying the units

Total direct materials $244,000

Total direct labor 488,000

Variable overhead costs 109,800

Cost to buy the units

Total costs $841,800

Should the company continue to manufacture the part, or should it buy the part from the outside supplier?

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Answers (1)
  1. 15 April, 05:47
    0
    It is more convenient to produce in house.

    Explanation:

    Giving the following information:

    Direct materials $ 4.00

    Direct labor 8.00

    Overhead 9.00

    Total costs per unit $ 21.00

    Direct materials and direct labor are 100% variable. The overhead is 80% fixed. An outside supplier has offered to supply the 61,000 units of RX5 for $19.00 per unit.

    The fixed costs are unavoidable, therefore we will concentrate the analysis in the variable costs.

    Make in house:

    Unitary cost = 4 + 8 + (9*0.20) = $13.8

    Buy = 19

    Difference = 19 - 13.8 = 5.2

    It is more convenient to produce in house.
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