Julian Company Should Buy Part X; Savings of $40,000

Answered using ChatGPT 4o by ChatGPT4o

Question:

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.

Answer:

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.

Cost of Making the Part:

  1. Direct Materials: $1 per unit
  2. Direct Labor: $10 per unit
  3. Variable Manufacturing Overhead: $5 per unit
  4. Fixed Manufacturing Overhead: $60,000 (which will be eliminated if the part is bought)

Total variable cost per unit = $1 + $10 + $5 = $16 per unit

For 10,000 units:

  • Total variable cost = 10,000 units * $16/unit = $160,000
  • Total fixed cost = $60,000

Total cost of making the part = $160,000 (variable) + $60,000 (fixed) = $220,000

Cost of Buying the Part:

  • Cost per unit = $20
  • For 10,000 units = 10,000 units * $20/unit = $200,000

Comparison:

  • Cost of making the part = $220,000
  • Cost of buying the part = $200,000

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:

  • Cost of making the part (after eliminating fixed overhead) = $160,000
  • Cost of buying the part = $200,000

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.