X Company currently buys a part from a supplier for $13.72 per unit but is consi

Question

X Company currently buys a part from a supplier for $13.72 per unit but is considering making the part itself next year. This year, they purchased 3,100 units of this part; next year, they think they will need 3,400 units. Estimated costs to make the part are:

Of the estimated fixed overhead, $4,321 are common costs that would be allocated to the part; the rest would be additional fixed overhead costs. X Company currently rents unused factory space for $2,900; it will have to use this space to make the part. If X Company continues to buy the part instead of making it, it will save......

Per-Unit Total      Direct materials $2.96    $9,176    Direct labor 4.53    14,043    Variable overhead 3.90    12,090    Fixed overhead 3.40    10,540    Total $14.79    $45,849   

Explanation / Answer

Net cost of buying the part: Cost of Buying the product (3400 units@13.72) 46648 less: Rented income of production capacity 2900 Net cost of buying the product 43748 Relevant cost of manufacture: Direct material (3400units@ 2.96) 10064 Direct labour (3400units@4.53) 15402 Variable overheads(3400 units@3.90) 13260 Avoidable fixed cost(10540-4321) 6219 Relevant cost of manufacture 44945 Therefore, Saving in cost in buying 1197 Company must buy the part

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