Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $15.90 per unit. This year, total costs to produce 66,000 units were:

Direct materials			$356,400
Direct labor			343,200
Variable overhead			290,400
Fixed overhead			303,600

If X Company buys the part, $48,576 of the fixed overhead is avoidable. 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 70,900 units. If X Company continues to make the part instead of buying it, it will save how much?

Answer 1

Answer- If X Company continues to make the part instead of buying it, it will save = $5234.

Explanation- Cost of making the part on 66000 units = Direct materials+ Direct labor+ Variable overhead+ Avoidable fixed overhead + Opportunity cost

= {($356400+$343200+$290400)/66000 units}*70900 units+ ($48576+$10000)

= $1063500+$48576+$10000

= $1122076

Cost of part purchase from outside supplier = 70900 units*$15.90 per unit

= $1127310

Saving in making part instead of buying it = Cost of purchase from outside supplier- Cost of making the part

= $1127310-$1122076

= $5234

Where- The unavoidable fixed cost have no effect on decision making, these cost are continue to occur whether product are manufactured or purchased.