Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $18.24 per unit. This year, total costs to produce 67,000 units were:

Direct materials $562,800 Direct labor 388,600 Variable overhead 234,500 Fixed overhead 268,000

If X Company buys the part, $45,560 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 71,100 units. If X Company buys the part instead of making it, it will save

Answer 1

1) If company produces the part:

Total variable cost for 67,000 units $1,185,900(562,800 + 388,600 + 234,500)

Variable cost per unit $17.7

Variable cost for making 71,100 parts = $1,258,470

2) If company buys material

Cost 71,100*18.24 = 1,296,864

Less avoidable fixed cost $45,560

Less additional contribution margin $10,000

Total cost $1,241,304

Total savings 1-2 = $17,166

Please note that the unavoidable fixed costs are not taken into calculation, however answer would remain same even if it is taken into calculation