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 $16.93 per unit. This year's per-unit production costs for 57,000 units of this part were:

Of the total fixed overhead costs, $108,300 were fixed, and $84,474 of these fixed overhead costs are unavoidable. If X Company buys the part, the resources that were used for production can be rented to another company for $75000. Production next year is expected to decrease to 61,450 units.

4. If X Company buys the part instead of making it, it will save?

Please need help!!! show your work and give me correct answer plz

Explanation / Answer

Answer:

Calculation of cost if X company makes the product:

Materials: $5.80

Direct labor: $5.30

Variable overhead rate: $6.20 - (108300/57000) = 6.20 - 1.9 = $4.3

Total overhead fixed: $108300

Total cost to make = (5.80+5.30+4.3)* 61450 + $108300 = $1054630

Calculation of cost if X company buys the product:

Purchase price: $16.93* 61450 = $1040348.5

Fixed overhead: $84474 (because this part of fixed cost is unavoidable and rest of the part can be avoided if company buys the product, therefore we will take only unavoidable fixed cost)

Total cost to buy = $1040348.5+$84474 - 75000 = $1049822.5

Saving = Cost to make - cost to buy

= $1054630 - $1049822.5 = $4807.5

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