X Company is considering buying a part next year that they currently produce. A

Question

X Company is considering buying a part next year that they currently produce. A company has offered to supply this part for $15.58 per unit. This year's total production costs for 60,000 units were: Of the total overhead costs, $78,000 were fixed, and $58,500 of these fixed overhead costs are unavoidable. If X Company buys the part, the resources that were used for production can be rented out for S70,000. Production next year is expected to increase to 63,850 units. If X Company continues to make the part instead of buying it, it will save

Explanation / Answer

Answer: If X Company continues to make the part instead of buying it, it will save $24,153.

Workings:

Marginal cost of making the part:

Materials ($ 330,000/60,000 units) $5.5

Direct labor ($ 324,000/60,000 units) 5.4

Variable overheads $ (252,000 -78,000)/ 60,000 units 2.9

Total marginal cost per unit $13.80

Next year production is expected to be 63,850 units

Hence if X Company was to make the part and not buy it, saving in total cost is $ (924783-900,630 ) =$ 24,153

Unavoidable fixed cost of $ 58,500 is not relevant cost for decision making, and hence has not been considered in either option.

Make Buy Materials (63,850x 5.5) 351,175 Direct labor ( 63,850 x 5.4) 344,790 Variable overhead ( 63,850 x 2.9 ) 185,165 Total marginal cost 881,130 Avoidable fixed cost $ (78,000-58500) 19,500 Purchase cost (63,85 x 15.58) 994,783 Rental income from idle resources ( 70,000 ) Total cost 900,630 924,783

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