Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $14.77 per unit. This year, total costs to produce 68,000 units were: Direct materials $340,000 Direct labor 367,200 Variable overhead 244,800 Fixed overhead 299,200 If X Company buys the part, $35,904 of the fixed overhead is avoidable. The resources that will become idle if they choose to buy the part can be used to increase production of another product, resulting in additional total contribution margin of $15,000. The marketing manager estimates that demand next year will increase to 72,500 units. If X Company continues to make the part instead of buying it, it will save

Answer 1

	Variable cost of production per unit =	$   14.00
	(340000+367200+244800)/68000
i	Saving in variable cost if bought from supplier	1015000
	14*72,500
ii	Saving in fixed cost=			35,904
iii	Increase in contribution margin =		15000
iv=i+ii+iii	Total cost of manufacturing			1,065,904
v=	Total cost of buying				1,070,825
	14.77*72500
vi=iv-v	Net saving =				4,921
	Ans is =					$             4,921