In: Accounting
X Company currently makes a part and is considering buying it from a company that has offered to supply it for $18.54 per unit. This year, per-unit production costs to produce 15,000 units were:
Direct materials | $8.30 |
Direct labor | 5.20 |
Overhead | 6.40 |
Total | $19.90 |
$52,500 of the total overhead costs were variable. $17,400 of the
fixed overhead costs are unavoidable 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 15,650 units.
If X Company buys the part instead of making it, it will save
Overhead per unit $6.40 when 15,000 units are produced.
Total overhead at 15,000 units = 15,000 x 6.40
= $96,000
Variable overheads = $52,500
Fixed overheads = Total overhead -Variable overheads
= 96,000-52,500
= $43,500
Variable overhead per unit = Total variable overheads/Number of units produced
= 52,500/15,000
= $3.5
Cost of Making | Cost of Buying | Increase/Decrease in Income | |
Direct materials | 15,650 x 8.30 = 129,895 | 0 | 129,895 |
Direct labor | 15,650 x 5.20 = 81,380 | 0 | 81,380 |
Variable overhead | 15,650 x 3.50 = 54,775 | 0 | 54,775 |
Fixed overhead | 43,500 | 17,400 | 26,100 |
Outside suppliers | 0 | 15,650 x 18.54 = 290,151 | -290,151 |
Total cost | $309,550 | $307,551 | 1,999 |
Saving in Buying = Cost of making -Cost of buying
= 309,550-307,551
= $1,999
If X Company buys the part instead of making it, it will save $1,999
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