Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $18.50 per unit. This year, total costs to produce 69,000 units were:

Direct materials			$469,600
Direct labor			376,200
Variable overhead			257,400
Fixed overhead			310,200

If X Company buys the part, $263,670 of the fixed overhead is unavoidable. The resources that will become idle if they choose to buy the part can be used to increase production of another product, resulting in additional total contribution margin of $15,000.

The marketing manager estimates that demand next year will increase to 70,750 units. If X Company buys the part instead of making it, it will save

Answer 1

Solution

X Company

Determination of the savings that would be made if the company buys the part instead of making 70,750 units:

	Make	Buy
Direct materials	$481,510
Direct labor	$385,741
Variable overhead	$263,928
Avoidable fixed overhead	$46,530
		$1,308,875
Less: additional contribution	($15,000)
Totals	$1,177,709	$1,293,875

The costs to buy $1,293,875 is higher than the cost to make, $1,177,709 by $116,166.

If the company buys the part the company would incur a loss of $116,166.

Note – avoidable fixed cost = 310,200 – 263,670 = $46,530

Computations –

per unit costs:
Direct materials	469,600/69,000 = $6.80
Direct labor	376,200/69,000 = $5.45
Variable overhead	257,400/69,000 = $3.73