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- Course Contents » SECOND CHANCE EXAM 2 » Question 1 ( ) Timer Notes Evaluate Feedback-Print eh Info X Company currently buys a part from a supplier for $12.93 per unit but is considering making the part itself next year. This year, they purchased 3,200 units of this part; next year, they think they will need 3,500 units. Estimated costs to make the part are: Total $10,720 10,240 12,480 16,320 Per-Unit Direct materials Direct labor Variable overhead Fixed overhead Total $3.35 3.20 3.90 5.10 $15.55 $49,760 Of the estimated fixed overhead, 7,834 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 continues to buy the part instead of making it, it will saveI Submit Answer Incorrect. Tries 1/5 Previous Tries

Explanation / Answer

Based on the above facts,

Company is presently buying 3,200 units of the part for $12.93 per unit. If the company continues to buy the part instead of making it, it will save:

1. Computation if company purchases 3,200 units of a part then it will save:

Savings in cost if company buys

3,200 units of a part from Supplier

for $12.93

Note:

* Total fixed cost is $16,320 and out of this $7,834 are common cost that would be attributable to the part . That is ($16,320-$8,486) $7,834 which is common cost.

-->Now, if the company purchases 3,500 units then the savings will be as under:

2. Computation if the company produces 3,500 units of a part:

Savings in cost if company buys

3,500 units of a part from supplier

for $12.93

Note:

** Total fixed cost is $16,320. Out of this $7,834 is common cost and remaining ($16,320- $7,834) $8,366 is additional fixed overhead. That is total fixed overhead for additional units is $16,320.

Therefore, it is concluded that company should buy units of a part from supplier to make savings in the total cost rather than producing it itself. For this savings on 3,200 units will be $1,998 and for 3,500 units savings would be $9,750

Particulars Cost per unit ($) Units Total ($) Direct Materials $3.35 3,200 $10,720 Direct Labour $3.20 3,200 $10,240 Variable Overhead $3.90 3,200 $12,480 Fixed Overhead - $7,834* Total (A) $41,274 +Rent of factory space (B) $2,100 Gross Total (A+B) $43,374 (-) Cost of buying from supplier $12.93 3,200 units $41,376

Savings in cost if company buys

3,200 units of a part from Supplier

for $12.93

$1998

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