Question

X Company currently makes a part and is considering buying it from a company that has offered to supply it for $19.69 per unit. This year, per-unit production costs to produce 17,000 units were:

Direct materials	$8.40
Direct labor	5.80
Overhead	6.90
Total	$21.10

$51,000 of the total overhead costs were fixed. $29,580 of the fixed overhead costs are avoidable 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 be 16,450 units.

If X Company buys the part instead of making it, it will save

Answer 1

If X Company buys the part instead of making it, it will save $3424.50

Working:

	Make unit	Buy unit	difference
Variable cost per unit:
Direct material	$            8.40	$                 -	$                8.40
Direct labour	$            5.80	$                 -	$                5.80
Variable overhead	$            3.90	$                 -	$                3.90
Purchase price from outside	$                -	$            19.69	$             -19.69
Total variable cost per unit	$          18.10	$            19.69	$               -1.59
Total units	16450	16450
Total Variable cost	$2,97,745.00	$ 3,23,900.50	$      -26,155.50
Avoidable fixed Cost	$   29,580.00	$                 -	$       29,580.00
Total Cost	$3,27,325.00	$ 3,23,900.50	$         3,424.50
If X Company buys the part instead of making it, it will save $3424.50

Variable Cost per unit = $3.90

total overhead cost = ( $6.90*17000 ) = $117,300

Fixed Overhead cost = $51000

Variable overhead cost = $117,300-51,000 = 66,300

Variable cost per unit = 66300/17000 = $3.90