X Company currently buys a part from a supplier for $14.49 per unit but is consi
ID: 2573980 • Letter: X
Question
X Company currently buys a part from a supplier for $14.49 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, $6,482 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 $2,800; 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 _______?
Explanation / Answer
X Company
Determination of cost of making the part:
Estimated number of units required = 3,400
Variable cost per unit –
Direct materials $3.98
Direct labor $4.01
Variable overhead $4.10
Total variable cost per unit = $12.09
Variable cost for 3,400 units = $12.09 x 3,400 = $41,106
Additional fixed overhead costs ($15,810 - $6,482) = $9,128
Opportunity cost (loss of rent from unused facility) = $2,800
Total cost to make 3,400 units of the part = $53,034
Total cost of buying 3,400 units of the part = $14.49 x $3,400 = $49,266
Excess of cost of making 3,400 units of the part = 3,768
Hence, if X Company continues to buy the part instead of making it, it will save = $3,768
Note:
Total fixed overhead - The allocated portion of common costs
Hence, the additional fixed overhead cost = $15,810 - $6,482 = $9,328
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