Question

X Company currently makes a part and is considering buying it from a company that has offered to supply it for $19.25 per unit. This year, per-unit production costs to produce 16,000 units were:

Direct materials	$8.20
Direct labor	5.70
Overhead	6.00
Total	$19.90

$36,800 of the total overhead costs were fixed. $20,240 of the fixed overhead costs are avoidable 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 15,300 units.

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

A: $2,829

B: $3,763

C: $5,005

D: $6,657

E: $8,853

F: $11,775

Answer 1

Correct answer-------------C: $5,005

Working

Differential Analysis
	Make	Buy
Direct material	$     125,460.00
Direct labor	$       87,210.00
Variable Overheads	$       56,610.00
Avoidable Fixed overhead	$       20,240.00
Purchase price		$       294,525.00
Total relevant Cost	$     289,520.00	$       294,525.00

.

Total Cost of Buying	$     294,525.00
Total Cost of manufacturing	$     289,520.00
Financial advantage of making	$          5,005.00