X Company is considering buying a part next year that they currently produce. A
ID: 2463451 • 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 $16.32 per unit. This year's per-unit production costs for 58,000 units were:
Of the total overhead costs, $92,800 were fixed, and $64,032 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 $70,000. Production next year is expected to increase to 61,700 units. If X Company buys the part instead of making it, it will save
Explanation / Answer
Total overheads = $5.50 * 58,000 units = $319,000
Fixed overhead = $92,800
Variable overhead = $319,000 - $92,800 = $226,200
Variable overhead per unit = $226,200 / 58,000 = $3.90
Total variable cost per unit = $6.90 + $4 + $3.90 = $14.80 per unit
Total cost of producing 61,700 units = ($14.80 * 61,700) + $92,800 = $1,005,960
Purchase price per unit = $16.32 per unit
Total Purchase price = $16.32 * 61,700 = $1,006,944
Unavoidable fixed overheads = $64,032
Income from renting the production resources = $70,000
Total cost if the company purchases the part = $1,006,944 + $64,032 - $70,000 = $1,000,976
Savings in case the part is bought = $1,005,960 - $1,000,976 = $4,984
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.