X Company is considering buying a part next year that they currently produce. A
ID: 2463301 • Letter: X
Question
X Company is considering buying a part next year that they currently produce. A company has offered to supply this part for $16.01 per unit. This year's per-unit production costs for 58,000 units were: overhead Of the total overhead costs, $81, 200 were fixed, and $55,216 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 61,500 units. If X Company continues to make the part instead of buying it, it will save [166050]Explanation / Answer
When the production capacity is 58,000 units
Per unit cost (in $)
Units
Total Cost (in $)
Material
$6.3
58,000
365,400
Direct labour
$5.2
58,000
301,600
Total Overhead
$4.1
58,000
237,800
904,800
Variable overhead=Total overhead + fixed overhead
Variable overhead=$237,800-$81,200
Variable overhead=$156,600
Variable overhead (per unit)=$156,600/58,000
Variable overhead (per unit)=$2.7
When the production capacity is 61,500 units
Per unit cost (in $)
Units
Total Cost (in $)
Material
$6.3
61,500
387,450
Direct labour
$5.2
61,500
319,800
Variable overhead
$2.7
61,500
166,050
Fixed overhead
81,200
Total Cost (A)
954,500
When the product is bought from outside
Per unit
61,500 units
Purchase cost
$16.01
$984,615
Unavoidable fixed cost
$55,216
Total
$1,039,831
Rent income from resources
$75,000
Net Cost (B)
$964,831
Cost saving by producing the prodict in-house=Cost when 61,500 units are bought from outside-Cost when 61,500 units are produced in-house
Cost saving by producing the product in-house=$964,831-$954,500
Cost saving by producing the product in-house=$10,331
When the production capacity is 58,000 units
Per unit cost (in $)
Units
Total Cost (in $)
Material
$6.3
58,000
365,400
Direct labour
$5.2
58,000
301,600
Total Overhead
$4.1
58,000
237,800
904,800
Variable overhead=Total overhead + fixed overhead
Variable overhead=$237,800-$81,200
Variable overhead=$156,600
Variable overhead (per unit)=$156,600/58,000
Variable overhead (per unit)=$2.7
When the production capacity is 61,500 units
Per unit cost (in $)
Units
Total Cost (in $)
Material
$6.3
61,500
387,450
Direct labour
$5.2
61,500
319,800
Variable overhead
$2.7
61,500
166,050
Fixed overhead
81,200
Total Cost (A)
954,500
When the product is bought from outside
Per unit
61,500 units
Purchase cost
$16.01
$984,615
Unavoidable fixed cost
$55,216
Total
$1,039,831
Rent income from resources
$75,000
Net Cost (B)
$964,831
Cost saving by producing the prodict in-house=Cost when 61,500 units are bought from outside-Cost when 61,500 units are produced in-house
Cost saving by producing the product in-house=$964,831-$954,500
Cost saving by producing the product in-house=$10,331
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