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X Company currently buys a part from a supplier for $13.86 per unit but is consi

ID: 2574952 • Letter: X

Question

X Company currently buys a part from a supplier for $13.86 per unit but is considering making the part itself next year. This year, they purchased 3,400 units of this part; next year, they think they will need 3,800 units. Estimated costs to make the part are:


Of the estimated fixed overhead, $6,038 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 $2,100; it will have to use this space to make the part. If X Company makes the part instead of buying it, it will save?

(The answer is not 6672)

Per-Unit Total      Direct materials $3.37    $11,458    Direct labor 4.58    15,572    Variable overhead 3.60    12,240    Fixed overhead 3.70    12,580    Total $15.25    $51,850   

Explanation / Answer

Answer:

If X Company makes the part instead of buying it, it will save $640

Working notes for the above answer is as under

Per-Unit

Total     

Direct materials (3.37*3800)

3.37

12806

Direct labor (4.58*3800)

4.58

17404

Variable overhead (3.60*3800)

3.6

13680

Fixed overhead

6038

Rent Income Forgotten

2100

Total

52028

Less: Purchase price (3800*13.86)

52668

Saving in making

640

Per-Unit

Total     

Direct materials (3.37*3800)

3.37

12806

Direct labor (4.58*3800)

4.58

17404

Variable overhead (3.60*3800)

3.6

13680

Fixed overhead

6038

Rent Income Forgotten

2100

Total

52028

Less: Purchase price (3800*13.86)

52668

Saving in making

640