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 52,000 units of RX5 follows. Direct materials Direct labor Overhead S 4.00 8.00 9.00 Total costs per unit $ 21.00 Direct materials and direct labor are 100% variable Overhead is 70% fixed. An outside supplier has offered to supply the 52,000 units of RX5 for $18.00 per unit Required: 1. Calculate the incremental costs of making and buying component RX5 Total incremental costs of: Making the units Buying the units Total costs Should the company continue to manufacture the part, or should it buy the part from the outside supplier? References eBook & Resources

Explanation / Answer

1) Total incremental costs of: Making the units Buying the units Direct Materials $ 4.00 Direct Labor $ 8.00 Variable Overhead $ 9.00*30% $ 2.70 Buying from outside supplier $ 18.00 Total costs $ 14.70 $ 18.00 Decision: Continue to manufacture the part Working: Only costs that affects decision are taken into account while making decision about cost or buy. Fixed costs are not considered in decision making.These costs are irrelevant so it has not been taken into account. As relevant cost of buying the units is more than making the units. So, Haver company should continue to manufacture the part.

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