Question

X Company currently makes a part and is considering buying it from a company that has offered to supply it for $18.78 per unit. This year, per-unit production costs to produce 19,000 units were:

Direct materials	$8.20
Direct labor	5.50
Overhead	5.90
Total	$19.60

$64,600 of the total overhead costs were variable. $20,900 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 19,950 units.

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

A: $3,289

B: $4,770

C: $6,916

D: $10,028

E: $14,541

F: $21,084

Answer 1

Variable overhead cost per unit = $64,600 / 19,000 = $3.40

Total fixed overhead cost = ($5.90 X 19,000) - $64,600 = $47,500

Total cost to make:

= [($8.20 + $5.50 + $3.40) X 19,950] + $47,500

= $388,645

Total cost to buy:

= ($18.78 X 19,950) + $20,900

= $395,561

Total cost to buy is more than total cost to make.

Cost saved = $395,561 - $388,645

= $6,916

Option C