X Company is considering buying a part next year that they
currently make. This year's production costs for 3,500 units were
as follows:
| Per-Unit | Total | ||
| Direct materials | $3.22 | $11,270 | |
| Direct labor | 3.69 | 12,915 | |
| Variable overhead | 3.60 | 12,600 | |
| Fixed overhead | 4.10 | 14,350 | |
| Total | $14.61 | $51,135 | |
A company has offered to supply this part to X Company for $13.24
per unit. If X Company accepts the offer, it will still incur fixed
costs of $7,032, but it will be able to lease the resources that
will become available from not making the part for $2,600. Next
year's expected production level is 4,000 units.
If X Company makes the part next year instead of buying it, it will
save
Solution:
| Differential Analysis- X Company - Making Part (alt 1) or Buying Part (Alt2) | |||
| Particulars | Making Part (Alt 1) | Buying Part (Alt 2) | Financial advantage (Disadvantage) of buying (Alternative 2) |
| Costs: | |||
| Purchase Price (4000*$13.24) | $0.00 | $52,960.00 | $52,960.00 |
| Direct material | $12,880.00 | $0.00 | -$12,880.00 |
| Direct Labor | $14,760.00 | $0.00 | -$14,760.00 |
| Variable overhead | $14,400.00 | $0.00 | -$14,400.00 |
| Avoidable Fixed Overhead ($14,350 - $7,032) | $7,318.00 | $0.00 | -$7,318.00 |
| Lease income | $0.00 | -$2,600.00 | -$2,600.00 |
| Total Cost | $49,358.00 | $50,360.00 | $1,002.00 |
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