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 and direct labor are 100% variable. Overhead is 60% fixed. An outside supplier has offered to supply the 69,000 units of RX5 for $21.00 per unit.

Calculate the per unit incremental costs of making and buying component RX5.

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.

Explanation / Answer

Cost of buying the component=69000*$21

=$1449000

cost of making the product=$69000*19

=$1311000

However the overheads to the amount of ($8*60%*69000) i.e $331200 are fixed irrespective of any production or not

hence the total incremental cost=$(1449000+331200-1311000)

$469200

HEnce incremental cost per unit=$469200/69000

=$6.8 per unit

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