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 $15.15 per unit. This year's total production costs for 59,000 units were:

Of the total overhead costs, $76,700 were fixed, and $56,758 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 $75,000. Production next year is expected to increase to 63,000 units. If X Company continues to make the part instead of buying it, it will save?

Materials $312,700 Direct labor [all variable] 259,600 Total overhead    283,200 Total production costs $855,500

Explanation / Answer

Make:

Buy:

$936,208 - $908,300 = $27,908 saving

Materials ($312,700 / 59,000 x 63,000) $333,900 Direct labor (259,600 / 59,000 x 63,000) $277,200 Total Overhead Fixed $76,700 Total Overhead Variable {( 283,200 - 76,700) / 59,000 x 63,000)} $220,500 Total costs to make $908,300

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