Haver Company currently produces component RX5 for its sole product. The equipment that is used to produce RX5 must be replaced, and management must decide whether to replace the equipment or buy RX5 from an outside supplier. The current cost per unit to manufacture the required 50,000 units of RX5 follows.
Direct materials . . . . . . . . . $ 5.00
Direct labor . . . . . . . . . . . . . 8.00
Overhead . . . . . . . . . . . . . . . 9.00
Total cost per unit . . . . . . $22.00
Direct materials and direct labor are 100% variable. Overhead is 80% fixed, and the current fixed overhead includes $0.50 per unit depreciation on the old equipment. If management buys the new equipment, it will incur depreciation of $1.12 per unit. An outside supplier has offered to supply the 50,000 units of RX5 for $18.00 per unit.
Required
1. Determine whether the company should make or buy the RX5.
2. What factors beside cost must management consider when deciding whether to make or buy RX5?