Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $16.71 per unit. This year, total costs to produce 69,000 units were:

Direct materials			$448,500
Direct labor			379,500
Variable overhead			262,200
Fixed overhead			296,700

If X Company buys the part, $44,505 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 $15,000.

The marketing manager estimates that demand next year will increase to 73,400 units. If X Company continues to make the part instead of buying it, it will save

Answer 1

Answer- If X Company continues to make the part instead of buying it, it will save = $7289.

Explanation- Cost of making the part on 73400 units = Direct materials+ Direct labor+ Variable overhead+ Avoidable fixed overhead + Opportunity cost

= {($448500+$379500+$262200)/69000 units}*73400 units+ ($44505+$15000)

= $1159720+$44505+$15000

= $1219225

Cost of part purchase from outside supplier = 73400 units*$16.71 per unit

= $1226514

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

= $1226514-$1219225

= $7289

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