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

Question

X Company is considering buying a part next year that they currently make. This year's per-unit production costs for 3,300 units were: Materials $3.95 Direct labor [all variable] 4.82 Variable overhead 4.50 Fixed overhead 3.00 Total production costs $16.27 A company has offered to supply this part for $15.75 per unit. If X Company buys the part, $5,346 of the fixed overhead can be avoided. Also if X Company buys the part, it can use the freed-up resources to increase production of another product, resulting in additional contribution margin of $2,800. Production next year is also expected to be 3,300 units. If X Company continues to make the part instead of buying it, it will save ______?

Explanation / Answer

Differential analysis :

If X Company continues to make the part instead of buying it, it will save 38

Make Buy Direct material 13035 Direct labour 15906 Variable overhead 14850 Fixed overhead 5346 Opportunity cost 2800 Purchase cost 51975 Total 51937 51975

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