X Company is considering buying a part next year that they currently produce. A

Question

X Company is considering buying a part next year that they currently produce. A company has offered to supply this part for $17.23 per unit. This year's total production costs for 51,000 units were:

Of the total overhead costs, $102,000 were fixed, and $77,520 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 $80,000. Production next year is expected to increase to 54,950 units. If X Company continues to make the part instead of buying it, it will save how much

Materials $280,500 Direct labor [all variable] 285,600 Total overhead    316,200 Total production costs $882,300

Explanation / Answer

Total ovehead                      = $316,200

Less: fixed cost                   = ($102,000)

Variable cost                      = $214,200

Avoidable fixed cost         = $102,000 - $77,520 = $24,480

For 54,950 units

Thus the company will save $842,308.50 - $840,735 = $1573.50

Make Buy Direct materials @5.5 $302,225 Direct labor @5.6 $307,720 Variable overhead @4.2 $230,790 Purchase @17.23 $946,788.50 Savings in fixed cost     (24,480) Savings in facility (rent)     (80,000) total cost $840,735 $842,308.50

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