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 $15.63 per unit. This year's per-unit production costs for 57,000 units were: Of the total overhead costs, $108,300 were fixed, and $83,391 of these fixed overhead costs are unavoidable. If X Company buys the part, the resources that were used for production can be rented to another company for $75,000. Production next year is expected to increase to 60,450 units. If X Company continues to make the part instead of buying it, it will save

Explanation / Answer

Cost of buying part from market

= Purchase price = 15.63 x 60450, = 944834

Add: unavoidable fixed cost = 83391

Less: rent income = 75000

NEt expense = 953225

Cost of manufacturing 60450 units

Material = 5.60 x 60450 , = 338520

Labor = 4.80 x 60450 ,=290160

Fixed overhead = 108300

Variable overhead = ( 188100 / 57000) x 60450 ,= 199485

Total expense = 936465

Saving in manufacturing = 953225 - 936465, = 16760

Variable overhead has been calculated as

Total Overhead at 57000 units

= 5.20 x 57000, =296400

LEss Fixed overhead = 108300 ( Given )

= Variable overheads = 188100

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