X Company is considering buying a part next year that they currently produce. A

Question

X Company is considering buying a part next year that they currently produce. A company has offered to supply this part for $16.39 per unit. This year's total production costs for 50,000 units were:

Of the total overhead costs, $60,000 were fixed, and $39,600 of these fixed overhead costs are unavoidable. If X Company buys the part, the resources that were used for production can be rented out for $70,000. Production next year is expected to increase to 53,300 units. If X Company continues to make the part instead of buying it, it will save____

Explanation / Answer

Material cost per unit = 330000/50000 = 6.6 per unit

Direct labour cost per unit = 250000/50000 = 5 Per unit

overhead cost (excluding fixed cost) = 210000- 39600 = 170400

Unavoidable cost will continue to be incurred irrespective of decision, hence unavoidable cost will be ignored in decision making

overhead cost per unit = 170400/50000 = 3.408

if company production increases to 53300 units then, total producton cost were

Material = 53300* 6.6 = 351780

Direct labour= 53300 * 5 = 266500

overhead cost = 53300 * 3.408 = 181646.4

Total production cost = 799926.4

Offer price = 53300 * 16.39 = 873587

Profit = 873587-799926.4 = 73660.6

If company rented out profit would be = 70000

If X Company continues to make the part instead of buying it, it will save = 73660.6-70000= 3660.6

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