Question

X Company currently makes a part and is considering buying it from a company that has offered to supply it for $20.47 per unit. This year, per-unit production costs to produce 15,000 units were:

Direct materials	$8.20
Direct labor	6.80
Overhead	5.80
Total	$20.80

$30,000 of the total overhead costs were fixed. $13,500 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 14,500 units.

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

Answer 1

It will save $10,715

Working

Total Cost of Buying	$           296,815
Total Cost of manufacturing	$           286,100
Financial advantage of making	$             10,715

.

Differential Analysis
	Make	Buy
Direct material	$     118,900.00
Direct labor	$       98,600.00
Variable Overheads (57000/15000 x 14500)	$       55,100.00
Avoidable Fixed overhead	$       13,500.00
Purchase price		$       296,815.00
Total relevant Cost	$     286,100.00	$       296,815.00

.

Overhead per unit	$              5.80
Total Units	15000
Total Overhead	$   87,000.00
Less: Fixed overhead	$   30,000.00
Variable overhead	$   57,000.00