Question

In: Accounting

X Company currently makes a part and is considering buying it next year from a company...

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $17.02 per unit. This year, total costs to produce 66,000 units were:

Direct materials $534,600
Direct labor 270,600
Variable overhead 257,400
Fixed overhead 297,000


If X Company buys the part, $246,510 of the fixed overhead is unavoidable. 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 $10,000.

The marketing manager estimates that demand next year will increase to 70,650 units. If X Company continues to make the part instead of buying it, it will save ? (is it 3,530?)

Solutions

Expert Solution

Total amount Divided: units Per unit
Direct materials $        534,600 66,000 $                   8.10
Direct labor $        270,600 66,000 $                   4.10
Variable overhead $        257,400 66,000 $                   3.90
Per unit Multiply: Units Total cost
Direct materials $               8.10 70,650 $            572,265
Direct labor $               4.10 70,650 $            289,665
Variable overhead $               3.90 70,650 $            275,535
Relevant cost of make option
Direct materials $        572,265
Direct labor $        289,665
Variable overhead $        275,535
Avoidable fixed overhead (297000-246510) $          50,490
Relevant cost of make option $    1,187,955
Relevant cost of buy option
Purchase cost from suppliers (70650*17.02) $    1,202,463
Less: Additional contribution margin $        (10,000)
Relevant cost of buy option $    1,192,463
Relevant cost of buy option $    1,192,463
Less: Relevant cost of make option $    1,187,955
Saving if company continues to make the part instead of buying $            4,508

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