Name: 8 ptX Company currently buys a part from a supplier for $13.59 per unit bu

Question

Name: 8 ptX Company currently buys a part from a supplier for $13.59 per unit but is considering making the part itself next year. This year, they purchased 3,200 units of this part; next year, they think they will need 3,700 units. Estimated costs to make the part are: Per-Unit Total Direct materials Direct labor Variable overhead Fixed overhead Total $3.55 3.85 3.70 5.70 $16.80 $11,360 12,320 11,840 18,240 853,760 Of the estimated fixed overhead, $8,573 are common costs that would be allocated to the part; the rest would be additional fixed overhead costs. X Company currently rents unused factory space for $2,500; it will have to use this space to make the part. If X Company buys the part instead of making it, it will save BO $2.037 CS2,954 DO $4,284 EO s6211 F°89,006 1. AO $1,405

Explanation / Answer

Costs that are relavent in decision making are the variable costs, avoidable fixed costs and additional fixed costs.

Avoidable fixed costs = Fixed costs - common costs

= 18,240 - 8,573 = 9,667

Additional fixed costs = 2,500

Total fixed costs = Avoidable fixed costs + Additional fixed costs

= 9,667 + 2,500 = 12,167

Fixed costs per unit = 12,167 / 3,700 = 3.2884

Total variable costs per unit = 3.55 + 3.85 + 3.7 = 11.1

Total costs per unit = Total variable costs per unit + Total fixed costs per unit

= 11.1 + 3.2884 = 14.3884

Savings = (14.3884 - 13.59) * 3,700 = 2,954  

The answer is C.

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