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

ID: 2463451 • 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 $16.32 per unit. This year's per-unit production costs for 58,000 units were:


Of the total overhead costs, $92,800 were fixed, and $64,032 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 $70,000. Production next year is expected to increase to 61,700 units. If X Company buys the part instead of making it, it will save

Materials $6.90 Direct labor [all variable] 4.00 Total overhead    5.50

Explanation / Answer

Total overheads = $5.50 * 58,000 units = $319,000

Fixed overhead = $92,800

Variable overhead = $319,000 - $92,800 = $226,200

Variable overhead per unit = $226,200 / 58,000 = $3.90

Total variable cost per unit = $6.90 + $4 + $3.90 = $14.80 per unit

Total cost of producing 61,700 units = ($14.80 * 61,700) + $92,800 = $1,005,960

Purchase price per unit = $16.32 per unit

Total Purchase price = $16.32 * 61,700 = $1,006,944

Unavoidable fixed overheads = $64,032

Income from renting the production resources = $70,000

Total cost if the company purchases the part = $1,006,944 + $64,032 - $70,000 = $1,000,976

Savings in case the part is bought = $1,005,960 - $1,000,976 = $4,984