X Company is considering buying a part next year that they currently produce. A

Question

X Company is considering buying a part next year that they currently produce. A company has offered to supply this part for $17.23 per unit. This year's total production costs for 51,000 units were:

Of the total overhead costs, $102,000 were fixed, and $77,520 of these fixed overhead costs are unavoidable. If X Company buys the part, the resources that were used for production can be rented out for $80,000. Production next year is expected to increase to 54,950 units. If X Company continues to make the part instead of buying it, it will save

Materials $280,500 Direct labor [all variable] 285,600 Total overhead    316,200 Total production costs $882,300

Explanation / Answer

From the above calculation, it is clear that if X Company continues to make the part instead of buying, it will save

$ 1,574 next year.

Cost ( 54,950 units) Make Buy $ $ Material cost ( $ 5.5 per unit) 302,225 Direct Labor( $ 5.6 per unit) 307,720 Variable overheads( $ 4.2 per unit) 230,790 Fixed avoidable overheads 24,480 Fixed unavoidable overheads 77,520 77,520 Total production cost 942, 735 NA Total purchase cost NA 946,789 Rental income (80,000) Total cost 942,735 944,309

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