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

Question

X Company is considering buying a part next year that they currently make. A company has offered to supply this part for $18.34 per unit. This year's total production costs for 58,000 units were:

Of the total overhead costs, $92,800 were fixed, and $65,888 of these fixed overhead costs were unavoidable. If X Company buys the part, the resources that were used for production can be rented out for $70,000. Production next year is expected to increase to 61,300 units. If X Company continues to make the part instead of buying it, it will save

Materials $406,000 Direct labor [all variable] 284,200 Total overhead    353,800 Total production costs $1,044,000

Explanation / Answer

Differential analysis :

If X Company continues to make the part instead of buying it, it will save 22010

Make Buy Direct material 429100 Direct labour 300370 Variable overhead 275850 Fixed overhead 26912 Opportunity cost 70000 Purchase cost 1124242 Total 1102232 1124242

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