Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 57,000 units of RX5 follows. Direct materials $ 5.00 Direct labor 9.00 Overhead 10.00 Total costs per unit $ 24.00 Direct materials and direct labor are 100% variable. Overhead is 80% fixed. An outside supplier has offered to supply the 57,000 units of RX5 for $20.00 per unit. Required: 1. Calculate the incremental costs of making and buying component RX5.

Answer

Making the product 922,000

Buying the product 1,140,000

Explanation:

Total Incremental Costs of:

Making the Units Buying the Units

Direct Material295,000 (5*57000)

Direct Labor 513,000

(9*57000)

Overhead 114,000

(10 - (10*80%) * 57000

Purchase Price 1,140,000 (20*57000)

Total Costs 922,000 1,140,000

To Make Incremantal Costs = $ 912,000

To Buy Incremental Costs = $ 1,140,000

Explanation:

incremental costs of making and buying component RX5

To Make Incremantal Costs

Direct materials $ 5.00 * 57,000 units 285,000

Direct labor $9.00 * 57,000 units 513,000

Overhead $10.00 * 20% * 57,000 units 114,000

Totals 912,000

To Buy Incremental Costs

Purchase Price $20.00 * 57,000 units 1,140,000

Totals 1,140,000

Note : Fixed Overheads have been excluded as they are incurred whether or not the Haver Company makes or buys the component RX5. Thus not incremental.