Harver company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 58000 units of RX5 follows. Direct materials and direct labor are 100% variable. Overhead is 70% fixed. An outside supplier has offered to supply the 58000 units of RX5 for 18.50 per unit. determine the total incremental cost making 58000 units of Rx5. Determine the total incremental cost of buying 58000 units of RX5. Should the company make or buy RX%

Decision = Make

Explanation:

The incremental cost to buy and the incremental cost to make can be calculated as follows

DATA

Direct material = $4  (100% variable)

Direct labor = $8 (100% variable)

Overhead = $9 ( 70% fixed)

Total cost per unit = $21

Offered price = $18.5 per unit

Total units = 58,000

Solution

Incremental cost of making

Direct material ( 58,000 x $4) = $232,000

Direct labor (58,000 x $8) = $464,000

Overhead ( 58,000 x $9 x 30%) = $156,600

Total cost = $825,600

Incremental cost of buying

Total cost = No. of units x offered price

Total cost = 58,000 x $18.5

Total cost = $1,073,000

Decision: The company should make the product as the total cost to buy is $247,400 higher than the cost to make.

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