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 $14.74 per unit. This year's total production costs for 55,000 units were:

Of the total overhead costs, $55,000 were fixed, and $42,350 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 $75,000. Production next year is expected to increase to 59,000 units. If X Company continues to make the part instead of buying it, it will save _____?

Materials $335,500 Direct labor [all variable] 231,000 Total overhead    192,500 Total production costs $759,000

Explanation / Answer

Differential analysis :

If X Company continues to make the part instead of buying it, it will save 26810

Make Buy Direct material 359900 Direct labour 247800 Variable overhead 147500 Fixed overhead 12650 Opportunity cost 75000 Purchase cost 869660 Total 842850 869660

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