Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $15.40 per unit. This year, total costs to produce 67,000 units were:

Direct materials			$435,500
Direct labor			301,500
Variable overhead			254,600
Fixed overhead			288,100

If X Company buys the part, $48,977 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 $10,000.

The marketing manager estimates that demand next year will increase to 71,800 units. If X Company buys the part instead of making it, it will save

A: $15,897

B: $17,964

C: $20,299

D: $22,938

E: $25,920

F: $29,289

Answer 1

	Per unit		Total 71800
	Make	Buy	Make	Buy
Direct materials	6.50		466700
Direct labor	4.50		323100
Variable overhead	3.80		272840
Fixed manufacturing overhead avoidable			48977
Opportunity cost			10000
Purchase cost		15.40		1105720
Total			1121617	1105720
Difference in favor of buying = 1121617-1105720 = $15,897
Option A $15,897 is correct