Question

This company currently makes a part and is considering buying it next year from a company that has offered to supply it for $18.25 per unit. This year, total costs to produce 65,000 units were:

Direct materials			$533,000
Direct labor			370,500
Variable overhead			247,000
Fixed overhead			325,000

If the company buys the part, $266,500 of the fixed overhead is unavoidable. 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 69,900 units. If the company buys the part instead of making it, it will save how much?

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Answer 1

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 (69900*$18.25)	$0.00	$1,275,675.00	-$1,275,675.00
Direct material	$573,180.00	$0.00	$573,180.00
Direct Labor	$398,430.00	$0.00	$398,430.00
Variable overhead	$265,620.00	$0.00	$265,620.00
Avoidable Fixed Overhead	$58,500.00	$0.00	$58,500.00
Loss of opportunity of new product margin	$10,000.00	$0.00	$10,000.00
Total Cost	$1,305,730.00	$1,275,675.00	$30,055.00

. If the company buys the part instead of making it, it will save = $30,055