Question

X Company currently makes a part and is considering buying it from a company that has offered to supply it for $18.20 per unit. This year, per-unit production costs to produce 19,000 units were:

Direct materials	$8.20
Direct labor	5.30
Overhead	5.20
Total	$18.70

$58,900 of the total overhead costs were variable. $17,955 of the fixed overhead costs are unavoidable 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 18,200 units.

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

A: $6,350

B: $7,175

C: $8,108

D: $9,162

E: $10,353

F: $11,699

Answer 1

	Per unit		Total 18200
	Make	Buy	Make	Buy
Direct materials	8.20		149240
Direct labor	5.30		96460
Variable overhead	3.10		56420
Fixed manufacturing overhead avoidable			21945
Purchase cost		18.20		331240
Total			324065	331240
Difference in favor of making = 324065-331240 = $7175
Option B $7,175 is correct

Total fixed overhead	39900	=(19000*5.2)-58900
Less: Fixed manufacturing overhead unavoidable	17955
Fixed manufacturing overhead avoidable	21945