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3:10 PM 1 s2.lite.msu.edu Concepts l Verizon Main Menu Contents Grades Course Contents »... » SECOND CHANCE Timer ? Notes Evaluate ,Feedback- PrintInfo X Company is considering buying a part next year that they currently make. A company has offered to supply this part for $16.20 per unit. This year's total production costs for 55,000 units were: Materials Direct labor 275,000 [all variable] Total overhead 258,500 Total production $874,500 costs $341,000 Of the total overhead costs, $93,500 were fixed, and $72,930 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 $80,000. Production next year is expected to increase to 58,650 units. If X Company continues to make the part instead of buying it, it will save Submit AnsrTries 0/3 Communication Blocked Sed Feedback

Explanation / Answer

Option 1 - If the company buys the product from outside

Amount paid to supplier (58,650 units * $16.20 per unit) = $950,130

Less: Saving in Overhead costs ($93,500 - $72,930) = $20,570

Less: Rental income = $80,000

Therefore, net total outflow would be = $849,560

Option 2 - If the company makes the product inhouse

Materials ($341,000/55,000 units) * 58,650 units = $363,630

Direct Labour ($275,000/55,000 units) * 58,650 units = $293,250

Variable Overhead = ($258,500 - $93,500)/55,000 units * 58,650 units = $175,950

Fixed Overhead (Avoidable portion) $93,500 - $72,930 = $20,570

Therefore, total cost of making the product inhouse = $853,400

Since total cost under option 1 is $849,560 whereas the cost under option 2 is $853,400, hence company will loose $3,840 if it makes the product inhouse.

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