X Company is considering buying a part next year that they currently make. A com
ID: 2572348 • Letter: X
Question
X Company is considering buying a part next year that they currently make. A company has offered to supply this part for $15.29 per unit. This year’s production costs per unit for 59,000 units were:
Direct Materials $6.50
Direct Labor 4.30
Total OH 4.60
TOTAL $15.40
Of the total overhead costs, $112,100 were fixed, and $80,712 of those fixed overhead costs are unavoidable. If X Company buys the part, the resources that were used for production can be rented to another company for $80,000. Production next year is expected to increase 62,700 units.
4. If company x continues to make the part instead of buying it, it will save
a. $617 b$722 c. $845 $989 e. $1,157 f. $1,353
5. Assume that X Company has an opportunity to negotiate the purchase price with the supplier. What price would make X company indifferent between making and buying?
a. $9.54 b. $11.16 c. $13.06 d. $15.28 e. $17.87 f. $20.91
Explanation / Answer
Notes:
1. Overhead cost per unit = $ 4.60
Quantity = 59,000 units
Total overhead = 59,000 X 4.6 = $ 271,400
Fixed overhead = $ 112,100 (unavoidable = $80,712 means they will be incurred in any situation)
Variable overhead = 271,400-112,100 = $ 159,300
Variable overhead per unit = ($ 159,300/59,000 units) = $ 2.70 per unit
Queation 4 : Answer is (c)
$846,450
(62,700 X 13.50)
$958,683
(62,700 X 15.29)
Saving if made inhouse = 959,395-958,550 = $ 845
Question 5: Answer is (d)
The company will save $ 845 on 62,700 units if manufactured inhouse which means per unit saving is $ 0.013 per unit ($ 845/62,700 units)
As such the minimum reduction in purchase price that the company would require to be in an indifferent position is $ 0.013.
Purchase price offered = $ 15.29
Reduction required $ 0.013
Negotiated price = $ 15.28
To make To buy Direct material + direct labour + variable overhead per unit $ 13.50 (6.50+4.30+2.70) $15.29 Quantity next year 62,700 62,700 Total variable cost$846,450
(62,700 X 13.50)
$958,683
(62,700 X 15.29)
Fixed cost $112,100 $ 80,712 Additional revenue from renting $80,000 Net expense (variable coat+fixed cost-revenue) $ 958,550 $ 959,395Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.