X Company is considering buying a part next year that they currently produce. A
ID: 2452952 • Letter: X
Question
X Company is considering buying a part next year that they currently produce. A company has offered to supply this part for $15.28 per unit. This year's total production costs for 57,000 units were:
Of the total overhead costs, $57,000 were fixed, and $45,030 of these fixed overhead costs are unavoidable. If X Company buys the part, the resources that were used for production can be rented out for $75,000. Production next year is expected to increase to 60,250 units. If X Company continues to make the part instead of buying it, it will save
Explanation / Answer
Given data,
Materials = $336300
Direct labour = $279300
Total Overheads = $222300
Fixed Overheads = $57000
Variable Overheads = $222300 - $57000 = $ 165300
Unavoidable fixed costs = $45030
Number of units = 57000
Total Variable costs
= Material + Labour + Variable Overheads
= $336300 + $279300 + $165300
= $780900
Variable cost per unit
= Total Variable Costs / Number of units
= $780900 / 57000
= $13.70
Total variable cost if 60250 units are produced
= $13.70 * 60250
= $825425
Total cost if company continues to make the part
= Variable cost + Fixed Cost
= $825425 + $57000
= $882425
Total cost if company buys the part
= Purchase cost + Unavoidable fixed cost - income by way of renting resources
= ($15.28 * 60250) + $45030 - $75000
= $920620 + $45030 - $75000
= $890650
Savings by making the part instead of buying it
= cost of buying - cost of making
= $890650 - $882425
= $8225
Savings = $8225
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