Question

# X Company currently makes a part and is considering buying it next year from a company...

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for \$18.99 per unit. This year, total costs to produce 67,000 units were:

Direct materials \$582,900

Direct labor 355,100 Variable

If X Company buys the part, \$36,984 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 71,300 units. If X Company buys the part instead of making it, it will save

Solution:

.

 Variable Cost Cost (\$) (a) Units (b) Variable cost per unit (a) / (b) Direct materials 582,900 67,000 8.7 Direct labor 355,100 67,000 5.3 Variable overhead 294,800 67,000 4.4

.

 Cost of Manufacturing 71,300 units Cost of Purchasing 71,300 units Direct materials (8.7 x 71,300) 620,310 Purchasing Cost (18.99 x 71,300) 1,353,987 Direct labor (5.3 x 71,300) 377,890 Fixed overhead 271,216 Variable overhead (4.4 x 71,300) 313,720 Less: contribution margin (10,000) Fixed overhead 308,200 Total Cost (A) 1,620,120 Total Cost (B) 1,615,203

Savings:

= (A) - (B)

= 1,620,120 -1,615,203

= 4,917

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