Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $17.41 per unit. This year, total costs to produce 69,000 units were:

Direct materials			$455,400
Direct labor			400,200
Variable overhead			282,900
Fixed overhead			324,300

If X Company buys the part, $38,916 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 73,600 units. If X Company continues to make the part instead of buying it, it will save

Answer 1

	Make	Buy
Direct materials	($6.6*73600)= $485760	-
Direct labor	($5.8*73600)= 426880	-
Variable overhead	($4.1*73600)= 301760	-
Avoidable fixed overhead	38916	-
Opportunity costs	10000	-
Purchase price	-	($17.41*73600)= $1281376
Total relevant cost	$1263316	$1281376

Direct materials per unit= $455400/69000= $6.6 per unit

Direct labor per unit= $400200/69000= $5.8 per unit

Variable overhead per unit= $282900/69000= $4.1 per unit

If X Company continues to make the part instead of buying it, it will save= $1281376-1263316= $18060