Question

X Company currently makes a part and is considering buying it from a company that has offered to supply it for $18.80 per unit. This year, per-unit production costs to produce 16,000 units were:

Direct materials $8.40

Direct labor 5.70

Overhead 5.30

Total $19.40

$33,600 of the total overhead costs were fixed. $18,816 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 15,400 units. If X Company continues to make the part instead of buying it, it will save

Answer 1

Total overhead cost = 16000 * 5.30	84800
Variable overhead cost per unit = ( 84800 - 33600 ) / 16000	3.20

	Make	Buy
Direct material [ 8.40*15400 ]	129360
Direct labor [ 5.70*15400 ]	87780
Variable overhead [ 3.20*15400 ]	49280
Fixed overhead	33600	14784 [ 33600-18816 ]
Cost of purchase [ 18.80*15400 ]	289520
Total cost	300020	304304

If X company continues to make the part instead of buying it, it will save $4284 [ i.e.304304-300020 ]