X Company is considering buying a part next year that they currently make. A com
ID: 2512837 • Letter: X
Question
X Company is considering buying a part next year that they currently make. A company has offered to supply this part for $16.37 per unit. This year's total production costs for 56,000 units were:
Of the total overhead costs, $89,600 were fixed, and $56,448 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 $80,000. Production next year is expected to increase to 60,350 units. If X Company buys the part instead of making it, it will save
Explanation / Answer
Particulars
Total
Per unit
Materials
$341,600
$6.10
Direct labor [all variable]
$246,400
$4.40
Total overhead (Variable)
(319,200-89,600)
$229,600
$4.10
Total production costs
$817,600
$14.60
Variable cost per unit
$14.60
Rental income
$80,000
Add: Avoidable fixed cost
(89,600-56,448)
$33,152
Less: Excess cost incurred for purchase
($16.37-$14.60)*60,350
($106,819.5)
Net increase in profit for purchase outside
$6,332.5
Ans
Savings = $6,332.5
Particulars
Total
Per unit
Materials
$341,600
$6.10
Direct labor [all variable]
$246,400
$4.40
Total overhead (Variable)
(319,200-89,600)
$229,600
$4.10
Total production costs
$817,600
$14.60
Variable cost per unit
$14.60
Rental income
$80,000
Add: Avoidable fixed cost
(89,600-56,448)
$33,152
Less: Excess cost incurred for purchase
($16.37-$14.60)*60,350
($106,819.5)
Net increase in profit for purchase outside
$6,332.5
Ans
Savings = $6,332.5
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