X Company currently makes a part and is considering buying it from a company has

Question

X Company currently makes a part and is considering buying it from a company has offered to supply it for $16.37 per unit. This year, per-unit production costs to produce 54,000 units were:

$178,200 of the total overhead costs were variable; $16,848 of the fixed overhead costs can be avoided if X Company buys the part. In addition, the resources that were used for production can be rented to another company for $75,000. Production next year is expected to increase to 59,000 units.

3. If X Company continues to make the part instead of buying it, it will save

Explanation / Answer

3 If X company continues to make the part instead of buying it,it will save Total cost under Make option: Direct materials (59000*7) 413000 Direct labor (59000*4.30) 253700 Variable overhead cost (178200/54000)*59000 194700 Fixed overhead cost 54000*[4.50-(178200/54000)] 64800 926200 Total cost under buy option: Purchase price (59000*16.37) 965830 Fixed cost (64800-16848) 47952 Rental income 75000 938782 savings due to making of component=938782-926200=12582

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