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 $16.01 per unit. This year's per-unit production costs for 58,000 units were:

Of the total overhead costs, $81,200 were fixed, and $55,216 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 $75,000. Production next year is expected to increase to 61,500 units. If X Company continues to make the part instead of buying it, it will save

Explanation / Answer

If company buys producct from market

purchase cost = 61500 x 16.01 = 984615

Add: unavoidable fixed costs = 55216 ( given)

Less: rent income = 75000

Net expense = 964831

If company produces itself

cost of material = 61500 x 6.30 = 387450

labor = 61500 x 5.20, =319800

Fixed overhead = 81200

Variable overhead = 166050 ( see note below)

Total expense = 954500

Saving in manufacturing = 964831 -954500, =10331

Note: GIven Overheads = 58000 x 4.10 ,= 237800

Less: fixed overhead( given) = 81200

variable overhead = 156600

now 156600 variable overheads relate to 58000 units

so proprtionate applicable to 61500 units =

(156600 /58000) x 61500, = 166050

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