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5 July, 22:41

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 9.00 Overhead 10.00 Total costs per unit 24.00 Direct materials and direct labor are 100% variable. Overhead is 70% fixed. An outside supplier has offered to supply the 50,000 units of RX5 for $19.00 per unit. Required: 1. Calculate the incremental costs of making and buying component RX5.

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  1. 5 July, 23:14
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    The incremental costs of making and buying component RX5 is $100,000

    Explanation:

    For computing the increment cost of making and buying component RX5, first we have to compute the cost of making and buying component RX5 separately.

    Cost of making includes:

    Direct Material = 50,000 * $5 = $250,000

    Direct Labor = 50,000 * 9 = $450,000

    Variable Overhead cost = 50,000 * 10 * 30% = $150,000

    So, total cost of making = Direct material cost + direct labor cost + variable overhead cost

    = $250,000 + $450,000 + $150,000

    = $850,000

    Now, the cost of buying component is equals to

    = units * RX5 per unit

    = 50,000 * $19

    = $950,000

    So, the incremental costs of making and buying component RX5 is equals to

    = cost of making - cost of buying component

    = $950,000 - $850,000

    = $100,000

    Hence, the incremental costs of making and buying component RX5 is $100,000
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