ter 23-Homework Help Sa Company currently produces component RXS for its sole pr

Question

ter 23-Homework Help Sa Company currently produces component RXS for its sole product. The current cost per unit to manufacture the required 54,000 units of RXS follows Overhead Total eoats per unie are 100% variable. Overhead is 80% foed. An outside supplier has offered to supply the S4000 units Direct materials and direct labor of RX5 for $19.00 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 compary continue to manufacture the part or should it buy the part from the outside supplier? MacBook Air

Explanation / Answer

Calculation of Incremental cost

Making the units

54,000 units

Buying the untis

54,000 units

$1,026,000

[54,000 x $19]

$216,000

[54,000 x $4]

$432,000

[54,000 x $8]

97,200

[54,000 x $9 x 20%]

Note: Since 80% of the overhead is fixed cost, the same shall not be taken into consideration during incremental analysis. These fixed cost in both the cases or alternatives.

Decision: Company shall continue to manufacture the product RX5, since the cost of manufacturing is less than cost of purchasing.

Total Incremental cost of

Making the units

54,000 units

Buying the untis

54,000 units

Purchasing RX5 Nil

$1,026,000

[54,000 x $19]

Direct material @$4 per unit

$216,000

[54,000 x $4]

Nil Direct labor @$8 per unit

$432,000

[54,000 x $8]

Nil Overhead @ 20% of $9 per unit

97,200

[54,000 x $9 x 20%]

Nil Total costs $745,200 $1,026,000

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