Question

X Company currently makes a part and is considering buying it from a company that has offered to supply it for $19.65 per unit. This year, per-unit production costs to produce 17,000 units were:

Direct materials	$8.50
Direct labor	5.10
Overhead	6.70
Total	$20.30

$37,400 of the total overhead costs were fixed. $16,456 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 17,950 units.

If X Company continues to make the part instead of buying it, it will save _____

Answer 1

Total overhead	113900	=17000*6.70
Less: Fixed overhead	37400
Variable overhead	76500
Variable overhead per unit	4.50	=76500/17000
	Per unit		Total 17950
	Make	Buy	Make	Buy
Direct materials	8.50		152575
Direct labor	5.10		91545
Variable overhead	4.50		80775
Fixed manufacturing overhead avoidable			20944
Purchase cost		19.65		352718
Total			345839	352718
Difference in favor of making = 345839-352718 = 6879
6879 is correct answer