Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $16.11 per unit. This year, total costs to produce 70,000 units were:

Direct materials			$497,000
Direct labor			329,000
Variable overhead			245,000
Fixed overhead			350,000

If X Company buys the part, $304,500 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 $15,000.

The marketing manager estimates that demand next year will increase to 74,150 units. If X Company buys the part instead of making it, it will save

A: $375

B: $438

C: $513

D: $600

E: $702

F: $822

Answer 1

	Relevant cost for decision making for next year for Make or Buy:-
	Make
	Units	74,150
	Particulars	Amount in $	Working
	Direct Materials	5,26,465	(497,000 x 74,150 )/ 70,000
	Direct Labour	3,48,505	(329,000 x 74,150 )/ 70,000
	Variable Overhead	2,59,525	(245,000 x 74,150 )/ 70,000
	Avoidable Fixed Overhead	45,500	( 350,000 - 304,500 )
	Total relevant Cost to Make	11,79,995
	Buy
	Units	74,150
	Particulars	Amount in $	Working
	Purchase cost	11,94,557	(74,150 x 16.11 )
	Less: Additional contribution margin after resources idle used to increase production of another product.	-15,000	Given
	Total net Relevant Cost to buy	11,79,557
	Saving if X company buys part instead of making it:-
	= Relevant cost to make - Relevant cost to buy
	= $ 11,79,995 - $ 11,79,557
	= $ 438
	Correct answer is option B i.e. $ 438