X Company currently makes a part and is considering buying it next year from a c
ID: 2575278 • Letter: X
Question
X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $17.37 per unit. This year, total costs to produce 55,000 units were:
Of the overhead costs, $66,000 were fixed, and $39,600 of these fixed overhead costs are unavoidable even if X Company buys the part. Production next year is not expected to change. If X Company continues to make the part instead of buying it, how much will it save?
Explanation / Answer
X Company
MAKE or BUY – Relevant Costs
Determination of cost of making the part:
Estimated number of units = $55,000
Variable costs –
Direct materials $352,000
Direct labor $264,000
Variable overhead $236,500
Total Variable cost $852,500
Add: Avoidable fixed costs $26,400
Total cost of MAKING $878,900
Cost of BUYING the part = $17.37 x 55,000 =$955,350
Saving in cost when the company opts to MAKE the part = $955,350 - $878,900 = $76,450
Hence, if X Company continues to MAKE the part instead of BUYING it, the company would save $76,450.
Note:
= $302,500 - $66,000 = $236,500
= $66,000 - $39,600 = $26,400
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