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.

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.

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