Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $18.14 per unit. This year, total costs to produce 66,000 units were:

Direct materials			$508,200
Direct labor			396,000
Variable overhead			257,400
Fixed overhead			290,400

If X Company buys the part, $238,128 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 $10,000.

The marketing manager estimates that demand next year will increase to 70,700 units. If X Company buys the part instead of making it, it will save

A: $15,044

B: $17,601

C: $20,593

D: $24,094

E: $28,190

F: $32,982

Answer 1

	Make	Buy
Direct materials	($7.7*70700)= $544390	-
Direct labor	($6*70700)= 424200	-
Variable overhead	($3.9*70700)= 275730	-
Avoidable fixed overhead	52272	-
Opportunity costs	10000	-
Purchase price	-	($18.14*70700)= $1282498
Total relevant cost	$1306592	$1282498

Direct materials per unit= $508200/66000= $7.7

Direct labor per unit= $396000/66000= $6

Variable overhead per unit= $257400/66000= $3.9

Avoidable fixed overhead= $290400-238128= $52272

If X Company buys the part instead of making it, it will save= $1306592-1282498= $24094

So, the asnwer is option D) $24094