Question

X Company currently makes a part and is considering buying it from a company that has offered to supply it for $18.93 per unit. This year, per-unit production costs to produce 20,000 units were:

Direct materials   $8.30
Direct labor   5.80
Overhead   5.50
Total   $19.60

$44,000 of the total overhead costs were fixed. $25,520 of the fixed overhead costs are avoidable 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 19,100 units.

If X Company continues to make the part instead of buying it, how much will it save?

Answer 1

If X Company continues to make the part instead of buying it, it will save $3,703

	Manufactured	Purchased
Units to be produced	19,100.00	19,100.00
Cost
Purchase cost	-	361,563
Direct materials	158,530	-
Direct labor	110,780	-
Variable overheads	63,030	-
Fixed Overheads	44,000	18,480
Total	376,340	380,043
Savings	3,703

1. Variable overhead per unit = (Total overhead - Fixed overhead)/ Units produced

= ((5.5 *20,000 units ) - 44,000)/ 20,000

= 66,000/ 20,000

= $ 3.3 per unit

2. Unavoidable Fixed overhead = 44,000 - 25520 = 18,480