Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $17.11 per unit. This year, total costs to produce 68,000 units were:

Direct materials			$462,400
Direct labor			367,200
Variable overhead			299,200
Fixed overhead			306,000

If X Company buys the part, $260,100 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 $10,000.

The marketing manager estimates that demand next year will increase to 72,200 units. If X Company buys the part instead of making it, it will save ________

Answer 1

Answer- If X Company buy the part instead of making it, it will save = $19078.

Explanation- Cost of making the part on 69900 units = Direct materials+ Direct labor+ Variable overhead+ Avoidable fixed overhead + Opportunity cost

= {($462400+$367200+$299200)/68000 units}*72200 units+ ($45900+$10000)

= $1198520+$45900+$10000

= $1254420

Cost of part purchase from outside supplier = 72200 units*$17.11 per unit

= $1235342

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

= $1254420-$1235342

= $19078

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