Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $17.84 per unit. This year, total costs to produce 65,000 units were:

Direct materials			$513,500
Direct labor			344,500
Variable overhead			260,000
Fixed overhead			325,000

If X Company buys the part, $292,500 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 69,400 units. If X Company buys the part instead of making it, it will save :

Answer 1

	Make decision	Buy decision	Net effect
Direct material	$548,260 (513,500/65,000*69,400)		$548,260
Direct labor	367,820 (344,500/65,000*69,400)		367,820
Variable overhead	277,600 (260,000/65,000*69,400)		277,600
Avoidable fixed overhead	32,500		32,500
Purchase price		1,238,096 (69,400*$17.84)	(1,238,096)
Additional contribution margin		(15,000)	15,000
Total	$1,226,180	$1,223,096	$3,084

If X company buys the part instead of making it, it will save $3,084