Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 50,000 units of RX5 follows. Direct materials $ 5.00 Direct labor 8.00 Overhead 9.00 Total costs per unit $ 22.00 Direct materials and direct labor are 100% variable. Overhead is 80% fixed. An outside supplier has offered to supply the 50,000 units of RX5 for $18.00 per unit. Required: 1. Calculate the incremental costs of making and buying component RX5.

It is cheaper to buy the product than producing it.

Explanation:

Giving the following information:

The current cost per unit to manufacture the required 50,000 units of RX5 follows. Direct materials $ 5.00 Direct labor 8.00 Overhead 9.00 Total costs per unit $ 22.00 Direct materials and direct labor are 100% variable. The Overhead is 80% fixed. An outside supplier has offered to supply the 50,000 units of RX5 for $18.00 per unit.

First, we need to calculate the total cost of making the product:

The total cost of producing 50,000 units:

Direct material = 50,000*5 = 250,000

Direct labor = 50,000*8 = 400,000

Total overhead = 50,000*9 = 450,000

Total cost = 1,100,000

Total cost of purchasing:

Buying = 50,000*18 = 900,000

Unavoidable overhead = 50,000 * (9*0.2) = 90,000

Total cost = 990,000

It is cheaper to buy the product than producing it.