Question

In: Accounting

X Company currently makes a part and is considering buying it from a company that has...

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?

Solutions

Expert Solution

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


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