Question

X Company is considering buying a part next year that it currently makes. A company has offered to supply this part for $16.67 per unit. This year's total production costs for 60,000 units were:

Materials	$384,000
Direct labor	330,000
Total overhead	234,000

$168,000 of X Company's total overhead costs were variable; $16,500 of X Company's fixed overhead costs can be avoided if it buys the part. If X Company buys the part, there are no alternative uses of the resources that were used for its production. Production next year is expected to increase to 63,150 units.

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

Answer 1

	Make	Buy	Net Income Increase (Decrease)
Direct material	$384,000/60,000*63,150 = $404,160		$                                                 (404,160)
Direct labor	$330,000/60,000*63,150 = $347,325		$                                                 (347,325)
Variable overhead	$168,000/60,000*63,150 = $176,820		$                                                 (176,820)
Fixed overhead	$234,000-$168,000 = $66,000	$66,000-$16,500 = $49,500	$                                                   (16,500)
Purchase cost		63,150*$16.67 = $1,052,710.50	$                                                1,052,711
Total Cost	$                                                        994,305	$                                          1,102,211	$                                                   107,906

if company make instead of buying, they will save $107,906

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