Haver Company currently produces component RX5 for its sole product. The current cost per
unit to manufacture the required 54,000 units of RX5 follows.
Direct materials and direct labor are 100% variable. Overhead is 70% fixed. An outside supplier
has offered to supply the 54,000 units of RX5 for $19.00 per unit.
Calculate the per unit incremental costs of making and buying component RX5.
Direct materials, direct labor, and overhead costs per unit for making and buying?
Haver Company currently produces component RX5 for its sole product. The current cost per
unit to manufacture the required 54,000 units of RX5 follows.
Solution
In case of Making:
Calculation of per unit incremental cost:
Fixed Cost will not be affected by make or buy decision.
In case of Buying:
Supplier offered 54,000 units @ $19.00 per unit.
So, company should continue to manufacture the product, because it has to pay $2 per unit extra
if purchased from outside.
Direct Material 5
Direct Labor 9
Overhead 3
Total Cost 17