Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $15.68 per unit. This year, total costs to produce 65,000 units were:

Direct materials			$350,000
Direct labor			325,000
Variable overhead			279,500
Fixed overhead			312,000

If X Company buys the part, $40,560 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 69,550 units. If X Company continues to make the part instead of buying it, it will save

Answer 1

Calucltion Excess cost to be paid per unit if purchased outside
price of outside supplier	15.68
Less: Our making cost
Direct Material	5.38	350000/65000
Direct Labor	5.00	325000/65000
Variable Manufacturing Overhead	4.30	(279500/65000)
Excess cost to be paid per unit if purchased outside	0.995
Excess cost to be paid (Total)	69,229	(69550*0.995)
Less: Saving in fixed cost	40,560
Less: Additional contribution margin	15,000
Net saving (if continue to make product)	(13,669)
X company will not save any amount it will incur loss on making