X Company currently buys a part from a supplier for $12.96 per unit but is consi

Question

X Company currently buys a part from a supplier for $12.96 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 3,800 units. Estimated costs to make the part are:

Of the estimated fixed overhead, $6,669 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______.

Per-Unit Total      Direct materials $3.57    $11,781    Direct labor 3.11    10,263    Variable overhead 3.90    12,870    Fixed overhead 4.70    15,510    Total $15.28    $50,424   

Explanation / Answer

Decision: Make or Buy? At 3300 Units (A) Buying Cost $          42,768 Cost per Unit $            12.96 (B) Manufacturing Cost Direct Material @ $3.57 $          11,781 Direct Labour @ $3.11 $          10,263 Variable Overhead $          12,870 Total Variable Cost (i) $          34,914 Fixed Overhead $          15,510 Less: Common Cost $            6,669 Allocated Fixed Overhead (ii) $            8,841 Manuf. Cost (i+ii) $          43,755 Add: Opportunity cost $            2,800 Total Manufacturing Cost $          46,555 Cost per Unit $            14.11 Saving per Unit (B-A) $              1.15 Total Saving $      3,787.00

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