X Company currently buys a part from a supplier for $13.12 per unit but is consi

Question

X Company currently buys a part from a supplier for $13.12 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 3,500 units. Estimated costs to make the part are: Direct materials Direct labor Variable overhead Fixed overhead Total Per-Unit $2.30 4.56 3.80 4.80 Total $7,130 14,136 11,780 14,880 $15.46 $47,926 Of the estimated fixed overhead, $6,101 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 $2,300; 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 -29211 Submit Answer Incorrect.Tries 2/5 Previous Tries

Explanation / Answer

Relevant costs are variable costs of production plus relevant fixed costs done only for production purposes plus income foregone for factory space

Common fixed overhead allocated to the part are not relevant as these are sunk costs which are allocated and have to be incurred even if production is not done

So, relevant fixed costs

= Total fixed costs – allocated fixed costs

= $14,880 - $6,101

= $ 8,779

So, Relevant costs per unit

= Variable costs per unit + (Relevant fixed costs + Income foregone) / Units to be produced

= $2.30 + $4.56 + $3.80 + ($8,779 + $2,300) / 3,500

= $10.66 + $3.17

= $13.83

So, Savings due to buying in place of producing

= (Production cost per unit – Buying cost) x Number of units

= ($13.83 - $13.12) x 3,500

= $ 2,469      

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