Question

X Company currently makes a part and is considering buying it from a company that has offered to supply it for $18.85 per unit. This year, per-unit production costs to produce 17,000 units were:

Direct materials	$8.30
Direct labor	6.00
Overhead	5.20
Total	$19.50

$39,100 of the total overhead costs were fixed. $16,813 of the fixed overhead costs are unavoidable if X Company buys the part. If the company buys the part, the resources that are used to make it cannot be used for anything else. Production next year is expected to be 16,300 units.

If X Company continues to make the part instead of buying it, it will save

Answer 1

2) Relevant cost
	Make($)	Buy($)
Direct material (16300*8.3)	1,35,290
Direct labor (16300*6)	97,800
Fixed overhead	39,100
Variable overhead (((17000*5.20)-39100)/17,000*16300)	47,270
Purchase cost (16,300*18.85)		3,07,255
Fixed cost		16,813
Total relevant cost	3,19,460	3,24,068
it will save = (324,068-319,460) = $4,608