Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $16.99 per unit. This year, total costs to produce 68,000 units were:

Direct materials			$516,800
Direct labor			326,400
Variable overhead			251,600
Fixed overhead			333,200

If X Company buys the part, $59,976 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 $10,000.

The marketing manager estimates that demand next year will increase to 72,050 units. If X Company buys the part instead of making it, it will save

Answer 1

	Make	Buy	Net Income Increase (Decrease)
Direct material	$516,800/68,000*72,050 = $547,580		$                                                   547,580
Direct labor	$326,400/68,000*72,050 = $345,840		$                                                   345,840
Variable overhead	$251,600/68,000*72,050 = $266,585		$                                                   266,585
Fixed manufacturing overhead	$                                                        333,200	$333,200-$59,976 = $273,224	$                                                      59,976
Purchase cost		72,050*$16.99 = $1,224,130	$                                             (1,224,130)
Opportunity cost		$                                          (10,000)	$                                                      10,000
Total Cost	$                                                    1,493,205	$                                      1,487,354	$                                                        5,851

If X Company buys the part instead of making it, it will save $5,851

You can reach me over comment box if you have any doubts. Please rate this answer