Question

X Company currently makes a part and is considering buying it from a company that has offered to supply it for $18.19 per unit. This year, per-unit production costs to produce 20,000 units were:

Direct materials	$8.20
Direct labor	5.90
Overhead	4.50
Total	$18.60

$50,000 of the total overhead costs were variable. $16,000 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 19,300 units.

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

Answer 1

	Make	Buy	Financial advantage (disadvantage)
Direct material ($8.20*19,300)	$ 158,260		$                                                        (158,260)
Direct labour ($5.90*19,300)	$ 113,870		$                                                        (113,870)
Variable overhead ($50,000/20,000*19,300)	$    48,250		$                                                          (48,250)
Fixed overhead ($20,000*4.50)-$50,000)	$    40,000	$    16,000	$                                                          (24,000)
Purchase cost ($18.19*19,300)		$ 351,067	$                                                          351,067
Total Cost	$ 360,380	$ 367,067	$                                                               6,687

If X Company continues to make the part instead of buying it, it will save $6,687

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