X Company currently buys a part from a supplier for $13.48 per unit but is consi
ID: 2575381 • Letter: X
Question
X Company currently buys a part from a supplier for $13.48 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, $7,344 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 $2,400; 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
Allocated fixed overhead ($7,344) should not be considered in decision making, since this is unavoidable and irrelevant.
Fixed overhead per unit = Relevant fixed cost / Estimated units
= (16,320 – 7,344) / 3,800
= $2.36
Opportunity cost per unit = 2,400 / 3,800 = $0.63
Making cost per-unit = Material + Labor + Variable overhead + Fixed overhead + Opportunity cost
= 3.44 + 4.39 + 3.30 + 2.36 + 0.63
= $14.12
Total making cost = Per-unit cost × Estimated units
= $14.12 × 3,800
= $53,656
Total buying cost = Per-unit cost × Estimated units
= $13.48 × 3,800
= $51,224
Since the buying cost is lesser than making, there is a saving.
Savings = Total making cost – Total buying cost
= 53,656 – 51,224
= $2,432 (Answer)
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