Question

X Company currently makes a part and is considering buying it from a company that has offered to supply it for $19.45 per unit. This year, per-unit production costs to produce 54,000 units were:

Direct materials	$8.50
Direct labor	6.50
Overhead	4.10
Total	$19.10

$167,400 of the total overhead costs were variable; $39,960 of the fixed overhead costs cannot be avoided even if X Company buys the part. If the company buys the part, the resources that are used to make it cannot be used for anything else. Production next year is expected to increase to 57,400 units.

If X Company continues to make the part instead of buying it, it will save _______

Answer 1

Total overheads of producing 54,000 units = 54,000 x 4.10

= $221,400

Variable overheads of producing 54,000 units = $167,400

Hence, variable overhead per unit = 167,400/54,000

= $3.1

Fixed overheads = Total overheads - Variable overheads

= 221,400 - 167,400

= $54,000

$39,960 of the fixed overhead costs cannot be avoided even if X Company buys the part.

Hence, avoidable fixed cost = Total fixed overheads - Unavoidable fixed overheads

= 54,000 - 39,960

= $14,040

	Cost of making	Cost of buying
Direct material	57,400 x 8.50 = $487,900	0
Direct labor	57,400 x 6.50 = $373,100	0
Variable overheads	57,400 x 3.1 = $177,940	0
Fixed overheads	$54,000	$39,960
Cost of buying	0	57,400 x 19.45 = $1,116,430
Total cost	$1,092,940	$1,156,390

If X Company continues to make the part instead of buying it, it will save = 1,156,390 - 1,092,940

= $63,450