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