X Company currently buys a part from a supplier for $13.86 per unit but is consi

Question

X Company currently buys a part from a supplier for $13.86 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, $6,038 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 $2,100; it will have to use this space to make the part. If X Company makes the part instead of buying it, it will save

Per-Unit Total      Direct materials $3.37    $11,458    Direct labor 4.58    15,572    Variable overhead 3.60    12,240    Fixed overhead 3.70    12,580    Total $15.25    $51,850   

Explanation / Answer

Per Unit

For 3,800 units

Direct material

$3.37

$12,806

Add: Direct Labor

$4.58

$17,404

Add: Variable overhead

$3.60

$13,680

Add: Fixed overhead

$3.51

$ 13,350

Total

$15.06

$57,240

Fixed overhead per unit = ($ 12,580 - $ 6,038)/3,300 = $ 6,542/3,300 = 1.924117

*Fixed overhead = $ 6,038 + (1.924117 x 3,800) = $ 6,038 + 7,311.647 = $ 13,349.65 or $ 13,350

Cost for purchasing = $ 13.86 x 3,800 = $ 52,668 - $ 2,100 = $ 50,568

Cost of making = Total cost for making = $ 57,240

Loss in making = $ 57,240 - $ 50,568 = $ 6,672

Per Unit

For 3,800 units

Direct material

$3.37

$12,806

Add: Direct Labor

$4.58

$17,404

Add: Variable overhead

$3.60

$13,680

Add: Fixed overhead

$3.51

$ 13,350

Total

$15.06

$57,240

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