Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $17.17 per unit. This year, total costs to produce 65,000 units were:

Direct materials			$468,000
Direct labor			351,000
Variable overhead			253,500
Fixed overhead			292,500

If X Company buys the part, $49,725 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 $10,000.

The marketing manager estimates that demand next year will increase to 69,900 units. If X Company buys the part instead of making it, it will save

A: $7,907

B: $8,935

C: $10,096

D: $11,409

E: $12,892

F: $14,568

Answer 1

	Make	Buy
Direct materials	($7.2*69900)= $503280	-
Direct labor	($5.4*69900)= 377460	-
Variable overhead	($3.9*69900)= 272610	-
Avoidable fixed overhead	49725	-
Opportunity costs	10000	-
Purchase price	-	(69900*$17.17)= 1200183
Total relevant cost	$1213075	$1200183

Direct materials per unit= $468000/65000= $7.2

Direct labor per unit= $351000/65000= $5.4

Variable overhead per unit= $253500/65000= $3.9

If X Company buys the part instead of making it, it will save= $1213075-1200183= $12892

So, the answer is option E) $12892