Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $15.99 per unit. This year, total costs to produce 67,000 units were:

Direct materials			$435,500
Direct labor			361,800
Variable overhead			234,500
Fixed overhead			274,700

If X Company buys the part, $46,699 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 71,400 units. If X Company buys the part instead of making it, it will save

Answer 1

Cost of making the product were:

		Per-Unit	Total for 71400 units
Materials	435500 / 67000	$6.5	464100
Direct labor [all variable]	361800 /67000	5.4	385,560
Variable overhead	234500 / 67000	3.5	249,900
Fixed overhead			274,700
Total			1,374,260

Cost of Buying the product were:

Purchase price [15.99*71400]	1,141,686
Add: unavoidable fixed costs [ 274700- 46699]	228,001
less: additional contribution margin	-10000
Total	1,359,687

If X Company buys the part instead of making it, it will save = 1,374,260 - 1,359,687 = $14,573