X Company currently buys a part from a supplier for $12.52 per unit but is consi

ID: 2574347 • Letter: X

Question

X Company currently buys a part from a supplier for $12.52 per unit but is considering making the part itself next year. This year, they purchased 3,300 units of this part; next year, they think they will need 3,600 units. Estimated costs to make the part are:

Per-Unit Total Direct materials $2.59 $8,547

Direct labor 4.40 14,520

Variable overhead 3.10 10,230

Fixed overhead 5.10 16,830

Total $15.19 $50,127

Of the estimated fixed overhead, $6,900 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 $2,600; 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 DM 2.59 8547 DL 4.40 14520 VOH 3.10 10230 FOH 5.10 16830 TOTAL 15.19 50127

Explanation / Answer

Incremental analysis for Part

Make the Part (3600 units)

Buy the Part (3600 units)

Net Income Increase / (Decrease)

Direct Material

$9324

$9,324

Direct Labor

$15,840

Variable Overhead

$11,160

Additional Fixed Overhead

$9,930

Purchase price

$45,072

-$45,072

Rent Income from unused factory space

-$2,600

$2,600

Total Annual cost

$46,254

$42,472

$3,782

If X Company continues to buy the part instead of making it, it will save $3,782.