Question

XX company budgeted 10,000 units for production during 2019. It has capacity to produce 12,000 units. Fixed factory overhead is allocated to production. The following estimated costs were provided for 10,000 units:

Direct material		$	70,000
Direct labor			300,000
Variable manufacturing overhead			40,000
Fixed factory overhead costs			50,000
Total		$	460,000

All fixed costs are unavoidable.

XX received an offer from another company to manufacture the 10,000 units for $39, for the same quality.

In this case, when XX compares between the relevant costs of making and that of buying, there will a difference of: $..................

Answer 1

			Positive/ (negative)
Particulars	Buy	Make	Effect of buying
Purchase price	$              39.00		$          (39.00)
Direct materials	$                     -	$              7.00	$              7.00
Direct labor	$                     -	$            30.00	$            30.00
Variable OH	$                     -	$              4.00	$              4.00
Variable cost per unit	$              39.00	$            41.00	$              2.00
× number of units	$      10,000.00	$    10,000.00	$    10,000.00
Total variable costs	$          390,000	$        410,000	$          20,000
Add: fixed costs
Traceble fixed costs	$                     -	$                   -	$                   -
Allocated fixed costs	$            50,000	$          50,000	$                   -
Less: incremental contribution	$                     -	$                   -	$                   -
Total costs	$          440,000	$        460,000	$          20,000

Answer is $20,000

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