The Julian Company manufactures a unit called X. Variable manufacturing costs per unit of X are as follows:
Direct materials $1 Direct labor $10 Variable manufacturing overhead $5
The Julian Company has offered to sell Julian 10,000 units of X for $20 per unit. If Julian accepts the offer, $60,000 of fixed manufacturing overhead will be eliminated.
Julian should:
Group of answer choices
make the part; the savings is $10,000.
buy the part; the savings is $20,000.
make the part; the savings is $60,000.
buy the part; the savings is $50,000.
To determine whether Julian should make or buy the part, we need to compare the total costs of making the part versus buying the part.
Total variable cost per unit = $1 + $10 + $5 = $16 per unit
For 10,000 units:
Total cost of making the part = $160,000 (variable) + $60,000 (fixed) = $220,000
If Julian buys the part, the fixed manufacturing overhead of $60,000 will be eliminated. Therefore, the effective cost of making the part, considering the elimination of fixed overhead, is:
Effective cost of making the part = $220,000 - $60,000 = $160,000
Savings if Julian buys the part = $200,000 - $160,000 = $40,000
Therefore, Julian should buy the part; the savings is $40,000. However, since this option is not listed, it seems there might be an error in the provided choices. Based on the calculations, the correct decision is to buy the part with a savings of $40,000.