Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $17.70 per unit. This year, total costs to produce 66,000 units were:

Direct materials			$435,600
Direct labor			382,800
Variable overhead			297,000
Fixed overhead			264,000

If X Company buys the part, $47,520 of the fixed overhead is avoidable. The resources that will become idle if they choose to buy the part can be used to increase production of another product, resulting in additional total contribution margin of $15,000.

The marketing manager estimates that demand next year will increase to 71,000 units. If X Company buys the part instead of making it, it will save

Answer 1

So, if X company buys the product instead of making it can save $5,720.

1.The saving is calculated under total cost approach.

2. In last table relevant cost approach is provided only for your understanding.

Hope you understood. If you have any doubt please leave your doubt in the comment section. So that I can clarify your doubt.

Thank you.