Question

X Company currently makes a part and is considering buying it from a company that has offered to supply it for $19.93 per unit. This year, per-unit production costs to produce 19,000 units were:

Direct materials $8.10
Direct labor 5.90
Overhead 6.60
Total $20.60

$81,700 of the total overhead costs were variable. $18,791 of the fixed overhead costs are unavoidable if X Company buys the part. If the company buys the part, the resources that are used to make it cannot be used for anything else. Production next year is expected to be 18,000 units. If X Company continues to make the part instead of buying it, it will save

Answer 1

Answer- If X Company continues make the part instead of buying it, it will save = $4431.

Explanation- Cost of making the part on 18000 units = Direct materials+ Direct labor+ Variable overhead+ Avoidable fixed overhead

= ($8.10 per unit+$5.90 per unit+$4.30 per unit)*18000 units+ ($43700-$18791)

= ($18.30 per unit*18000 units)+ $24909

= $329400+$24909

= $354309

Where- Variable overhead per unit = $81700/19000 units

= $4.3 per unit

Cost of part purchase from outside supplier = 18000 units*$19.93 per unit

= $358740

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

= $358740 - $354309

= $4431

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