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

Question

X Company is considering buying a part next year that they currently make. A company has offered to supply this part for $17.67 per unit. This year's total production costs for 54,000 units were:

Of the total overhead costs, $108,000 were fixed, and $77,760 of these fixed overhead costs were unavoidable. If X Company buys the part, the resources that were used for production can be rented out for $70,000. Production next year is expected to increase to 57,950 units. If X Company continues to make the part instead of buying it, it will save ____

Materials $361,800 Direct labor [all variable] 302,400 Total overhead    302,400 Total production costs $966,600

Explanation / Answer

Differential analysis :

If X Company continues to make the part instead of buying it, it will save 2331.50

Make Buy Direct material 388265 Direct labour 324520 Variable overhead 208620 Fixed overhead 30240 Opportunity cost 70000 Purchase cost 1023976.50 Total 1021645 1023976.50

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