In: Accounting
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?)
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 |