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 3,000 units were:

A company has offered to supply this part for $11.73 per unit. If X Company buys the part, $6,438 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 $2,300. Production next year is also expected to be 3,000 units.

2. If X Company buys the part instead of making it, how much will it save?

Materials $2.86 Direct labor [all variable] 3.68 Variable overhead 2.70 Fixed overhead     3.70 Total production costs $12.94

Explanation / Answer

Differential analysis :

If X Company buy the part instead of making it, it will save 1268

Make Buy Direct material 8580 Direct labour 11040 Variable overhead 8100 Fixed overhead 6438 Opportunity cost 2300 Purchase cost 35190 Total 36458 35190

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