Julian Company Should Buy Part X to Save $20,000

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 it.

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: This will be eliminated if the part is bought, so it should be considered in the cost of making the part.

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

Fixed manufacturing overhead = $60,000

Total cost of making the part = $160,000 + $60,000 = $220,000

Cost of Buying the Part:

Cost per unit = $20

For 10,000 units: Total cost of buying the part = 10,000 units * $20/unit = $200,000

Comparison:

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

Savings:

Savings if Julian buys the part = Cost of making the part - Cost of buying the part = $220,000 - $200,000 = $20,000

Therefore, Julian should buy the part, and the savings will be $20,000.

The correct answer is: buy the part; the savings is $20,000.