X Company currently buys a part from a supplier for $13.09 per unit but is consi

Question

X Company currently buys a part from a supplier for $13.09 per unit but is considering making the part itself next year. This year, they purchased 3,400 units of this part; next year, they think they will need 3,800 units. Estimated costs to make the part are:

Of the estimated fixed overhead, $8,282 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 $3,000; 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 ____

Per-Unit Total      Direct materials $3.69    $12,546    Direct labor 4.32    14,688    Variable overhead 2.70    9,180    Fixed overhead 5.80    19,720    Total $16.51    $56,134   

Explanation / Answer

Total cost of buying the part (3800 units) = 13.09*3800 = 49742

Estimated Cost to make 3800 units are as follows:

per unit Total

Direct materials 3.69 14022

Direct labor 4.32 16416

Variable overhead 2.70 10260

Fixed Overhead 2.44 9272

(allocated to part)

Aditional Fixed Overhead 11438

(19720 - 8282)

Opportunity cost of Space 3000

Total cost 64408

If X Company continues to buy the part instead of making it, it will save 64408 - 49742 = 14666

Direct materials 3.69 14022

Direct labor 4.32 16416

Variable overhead 2.70 10260

Fixed Overhead 2.44 9272

(allocated to part)

Aditional Fixed Overhead 11438

(19720 - 8282)

Opportunity cost of Space 3000

Total cost 64408

If X Company continues to buy the part instead of making it, it will save 64408 - 49742 = 14666

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