Question

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

overhead 294,800

Fixed overhead 308,200

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

Answer 1

Answer: $ 4,917

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