X Company currently buys a part from a supplier for $13.29 per unit but is consi

Question

X Company currently buys a part from a supplier for $13.29 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 3,300 units. Estimated costs to make the part are:

Per-Unit Total

Direct materials $2.90 $8,700

Direct labor 4.38 13,140

Variable overhead 3.70 11,100

Fixed overhead 4.90 14,700

Total $15.88 $47,640

Of the estimated fixed overhead, $7,056 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 $2,700; 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

Incremental analysis for Part Make the Part (3300 units) Buy the Part (3300 units) Net Income Increase / (Decrease) Direct Material $9,570 $9,570 Direct Labour $14,454 $14,454 Variable Overhead $12,210 $12,210 Additional Fixed Overhead $7,644 $7,644 Purchase price $43,857 -$43,857 Rent Income from unused factory space -$2,700 $2,700 Total Annual cost $43,878 $41,157 $2,721 If X Company continues to buy the part instead of making it, it will save $2,721.

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