Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 55,000 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 70% fixed. An outside supplier has offered to supply the 55,000 units of RX5 for $20.00 per unit. Required: 1. Calculate the incremental costs of making and buying component RX5.

If the company makes the component, $165,000 will be saved.

Explanation:

Giving the following information:

Units production= 55,000 units

Production costs:

Direct materials $5

Direct labor $9

Avoidable Overhead= 3

Direct materials and direct labor are 100% variable.

An outside supplier has offered to supply the 55,000 units of RX5 for $20.00 per unit.

We need to determine the total cost of making in-house and buying.

We will take into account only the variable cost (avoidable cost).

Make in-house:

Total cost= 55,000*(5 + 9 + 3)= $935,000

Buy:

Total cost= 55,000*20= $1,100,000

If the company makes the component, $165,000 will be saved.

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