X Company is considering buying a part next year that they currently produce. A
ID: 2453305 • 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 $15.74 per unit. This year's total production costs for 54,000 units were:
Materials $302,400
Direct labor [all variable] 264,600
Total overhead 237,600
Total production costs $804,600
Of the total overhead costs, $54,000 were fixed, and $39,960 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 57,850 units. If X Company continues to make the part instead of buying it, it will save?
Explanation / Answer
Fixed Overhead Costs $ Unaviodable 39960 Aviodable 14040 Current Production Scenario No.of units Cost $ Price/unit $ Material 54000 302400 5.6 Labour 54000 264600 4.9 Variable Overheads 54000 183600 3.4 Fixed Overheads 54000 Next Year Production Scenario No.of units Cost $ Price/unit $ Material 57850 323960 5.6 Labour 57850 283465 4.9 Variable Overheads 57850 196690 3.4 Fixed Overheads 54000 Total Cost if Production continues 858115 If purchase is done from an outside supplier Purchase Cost 910559 Less : Investment done for production costs -80000 Less : Aviodable Fixed Overheads -14040 Total Cost for Procuring Parts Externally 816519 Since the cost of procuring the parts is lower than manufacturing the same in-house, X Company will lose $ 41,596 if it continues the production in house.
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