Question

X Company is considering buying a part next year that they currently make. A company has offered to supply this part for $14.74 per unit. This year's total production costs for 55,000 units were:

Materials	$335,500
Direct labor [all variable]	231,000
Total overhead	192,500
Total production costs	$759,000

Of the total overhead costs, $55,000 were fixed, and $42,350 of these fixed overhead costs were unavoidable. If X Company buys the part, the resources that were used for production can be rented out for $75,000. Production next year is expected to increase to 59,000 units. If X Company continues to make the part instead of buying it, it will save _____?

Answer 1

Differential analysis :

	Make	Buy
Direct material	359900
Direct labour	247800
Variable overhead	147500
Fixed overhead	12650
Opportunity cost	75000
Purchase cost		869660
Total	842850	869660

If X Company continues to make the part instead of buying it, it will save 26810