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 $15.84 per unit. This year's total production costs for 50,000 units were: Of the total overhead costs, $80,000 were fixed, and $56,000 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 $80,000. Production next year is expected to increase to 54,400 units. If X Company buys the part instead of making it, it will save

Explanation / Answer

cost for making part at expected units

materials = 335000/50000 *54400 = 386240

direct labour = 215000/50000 *54400 = 233920

total overheads

fixed = 80000

variable = 165000/50000 *54400 = 179520

TOTAL PRODUCTION COSTS = $879680

cost for buying the product

purchase price = 861696 (54400*15.84)

fixed overhead cost = 56000 (unavoidable)

(-)rental income = 80000

TOTAL COST = $837696

SAVINGS   = 879680 - 837696

=$41984

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