Question

X Company currently makes a part and is considering buying it from a company that has offered to supply it for $17.79 per unit. This year, per-unit production costs to produce 57,000 units were:

Direct materials	$8.20
Direct labor	5.50
Overhead	4.40
Total	$18.10

$148,200 of the total overhead costs were variable; $71,820 of the fixed overhead costs cannot be avoided even 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 increase to 60,150 units.

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

Answer 1

If company X continues making instead of buying , It will save

$       58,843.50 or $58844 rounded off

Total Cost of Buying	$ 10,70,068.50
Total Cost of manufacturing	$ 10,11,225.00
Cost saving if manufactured	$       58,843.50

Diffrencial Analysis
	Make	Buy
Direct material	$          4,93,230	$                        -
Direct labor	$          3,30,825	$                        -
Variable Overheads	$          1,56,390	$                        -
Avoidable Fixed overheads	$             30,780	$                        -
Outside purchase price	$                       -	$         10,70,069
Total Cost	$       10,11,225	$         10,70,069

Per Unit Cost
	Make	Buy
Direct material	$                    8.20	$                        -
Direct labor	$                    5.50	$                        -
Variable Overhead (148200/57000)	$                    2.60	$                        -
Outside purchase price	$                        -	$                 17.79
Total Cost	$                 16.30	$                 17.79

Total Overheads (57000 x 4.4)	$ 2,50,800.00
Less: Variable Overheads	$ 1,48,200.00
Total Fixed overheads	$ 1,02,600.00
Less: Unavoidable Fixed overheads	$      71,820.00
Avoidable Fixed overheads	$      30,780.00