X Company currently buys a part from a supplier for $13.72 per unit but is consi
ID: 2575325 • Letter: X
Question
X Company currently buys a part from a supplier for $13.72 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, $6,468 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 makes the part instead of buying it, it will save ?
I tried:
Per Unit
For 3,800 units
Direct material
$ 3.74
$ 14,212
Add: Direct Labor
$ 4.88
$ 18,544
Add: Variable overhead
$ 2.60
$ 9,880
Add: Fixed overhead
$ 3.7421
$ 14,220
Total
$ 14.962
$ 56,856
Fixed overhead per unit = ($ 13,200 - $ 6,468)/3,300 = $ 6,732/3,300 = $ 2.04
*Fixed overhead = $ 6,468 + (2.04 x 3,800) = $ 6,468 + 7,752 = $ 14,220
Cost for purchasing = $ 13.72 x 3,800 = $ 52,136
Cost of making = Total cost for making + rent opportunity = $ 56,856 + $ 2,600 = $ 59,456
Save in making = $ 52,136 - $ 59,456 = ($ 7,320)
But this was incorrect
Per-Unit Total Direct materials $3.74 $12,342 Direct labor 4.88 16,104 Variable overhead 2.60 8,580 Fixed overhead 4.00 13,200 Total $15.22 $50,226Explanation / Answer
No of units = 3,800
Relavent costs to produce = Direct materials + Direct labour + Variable overhead + Fixed costs associated with the product + Opportunity cost of lost rent
= (3.74 * 3,800) + (4.88 * 3,800) + (2.6 * 3,800) + (13,200 - 6,468) + 2,600
= 14,212 + 18,544 + 9,880 + 6,732 + 2,600
= 51,968
Cost when purchsed = 13.72 * 3,800 = 52,136
Savings = Costs when purchased - Relavent costs to produce
= 52,136 - 51,968
= 168.
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