X Company currently buys a part from a supplier for $13.25 per unit but is consi

ID: 2573680 • Letter: X

Question

X Company currently buys a part from a supplier for $13.25 per unit but is considering making the part itself next year. This year, they purchased 3,000 units of this part; next year, they think they will need 3,500 units. Estimated costs to make the part are: Direct materials Direct labor Variable overhead Fixed overhead Total Per-Unit $3.40 4.29 3.20 5.60 Total $10,200 12,870 9,600 16,800 $16.49 $49,470 Of the estimated fixed overhead, $8,064 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 $2,800; it will have to use this space to make the part. If X Company continues to buy the part instead of making it, it will save

Explanation / Answer

Total costs for 3500 units

Direct materials

$11900

Direct labor

$15015

Variable overhead

$11200

Additional fixed overhead

$8736

Rent of factory space

$2800

Total costs needed for making 3500 units

$49651

Buying price of 3500 units (3500 * $13.25)

$46375

Total saving if continue to buy ($49651 – $46375)

$3276

Per unit saving if continue to buy ($3276 / 3500)

$0.936