Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $18.90 per unit. This year, total costs to produce 68,000 units were:

Direct materials			$544,000
Direct labor			394,400
Variable overhead			285,600
Fixed overhead			285,600

If X Company buys the part, $239,904 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 $15,000.

The marketing manager estimates that demand next year will increase to 72,050 units. If X Company continues to make the part instead of buying it, it will save

Answer 1

	Per unit
Direct materials [ 544000/68000 ]	8.00
Direct labor [ 394400/68000 ]	5.80
Variable overhead [ 285600/68000 ]	4.20

	Make	Buy
Direct material [ 72050*8 ]	576400
Direct labor [ 72050*5.80 ]	417890
Variable overhead [ 72050*4.20 ]	302610
Fixed overhead	285600	239904
Cost of purchase [ 72050*18.90 ]		1361745
(-) Additional contribution margin earned	15000
Total cost	1582500	1586649

If X company continues to make the part instead of buying it, it will save $4149 [ i.e.1586649 - 1582500 ]