1. Determine the total incremental cost of making 51,000 units of RX5. 2. Determine the total incremental cost of buying 51,000 units of RX5. 3. Should the company make or buy RX5

Answer with Explanation:

Requirement 1:

Incremental cost of making RX5:

Always remember that the direct costs are always incremental cost because these are the variable cost and will not be incurred if the decision is not taken related to making of the product RX5.

Incremental Cost of Making RX5:

Direct Material ($4 * 51,000 Units)                      $204,000

Direct Labor ($8 * 51,000 Units)                          $408,000

Variable Overheads ($9* 20% * 51,000 Units)     $91,800  

Total incremental cost of making 51000 units   $703,800

Requirement 2:

Incremental Cost of Buying RX5:

Purchase Cost ($19 per Unit * 51,000 Units) $969,000

The total incremental cost of making 51000 units is $969,000

Requirement 3:

The Cost of buying is higher than making RX5, hence the company should Make RX5.

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