X Company is considering buying a part next year that they currently make. This year's per-unit...
Question:
X Company is considering buying a part next year that they currently make. This year's per-unit production costs for 3500 units were:
Materials: $3.02
Direct labor (all variable): 3.66
Variable overhead: 3.30
Fixed overhead: 6.00
Total production costs: $15.98
A company has offered to supply this part of $12.38 per unit. If X Company buys the part, $12180 of the fixed overhead can be avoided. Also, if X Company buys the part, it can use the freed-up resource to increase the production of another product, resulting in an additional contribution margin of $2400. Production next year is also expected to be 3500 units.
1. If X Company buys the part instead of making it, how much will it save?
2. At what production level would X Company be indifferent between making and buying the part?
Incremental or Differential Analysis for Make or Buy Decision:
When firms are encountered with 2 alternatives and are required to select the best alternative, they resort to a differential or incremental analysis whereby all the relevant costs for different alternatives are considered differently and the unavoidable fixed costs which are uniform across alternatives are ignored.
Answer and Explanation: 1
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View this answerThe answers to both the sub-questions are explained below:
1. If X Company buys the part instead of making it, how much will it save?
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Differential Cost in Managerial Decision Making
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Chapter 4 / Lesson 3
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Differential cost compares two procedures or plans to identify their difference in cost. See how differential cost occurs and is used to guide managerial decisions through an example.
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