X Company is considering buying a part next year that they currently produce. A
ID: 2453142 • 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 $16.85 per unit. This year's total production costs for 55,000 units were:
Of the total overhead costs, $77,000 were fixed, and $46,200 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 $70,000. Production next year is expected to increase to 59,450 units. If X Company continues to make the part instead of buying it, it will save:
materials $302,500 direct labor (all variable) $302,500 total overhead 302,500 total production costs $907,500Explanation / Answer
Calculation of production cost per unit next year:
Particulars Amount
Materials $302,500
Direct Labour $302,500
Total Overhead $256,300 [302,500-46,200 unavoidable costs]
Rent $70,000 [ Loss of savings in opportunity cost]
Total production costs $ 931,300
Expected production 59,450 units
Production cost per unit = 931,300/59,450 = 15.67/-
Since $15.67 is less than $16.85, It is better to continue with producing the product instead of buying proposal.
Note: Unavoidable fixed costs are fixed costs which can't be avoided, if the production takes place or not. Hence,
that extent is not considered for decision making.
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