Question

XM Company currently buys 15,000 units of a part used to manufacture its product at $39 per unit. The supplier recently informed XM Company that a 20 percent increase will take effect next year. XM has some additional space and could produce the units for the following per-unit costs (based on 15,000 units): Direct materials $18 Direct labor $12 Variable manufacturing overhead $10 If XM purchases the units from the supplier, XM can rent out the plant for $22,500 per year. Required: a. Should XM Company buy the part externally or make it internally? Use differential analysis to support your answer. b. If any costs were excluded from the analysis, briefly explain why each cost was not used in the analysis.

          XM Company currently buys 15,000 units of a part used to
manufacture its product at $39 per unit.  The supplier
recently informed XM Company that a 20 percent increase will take
effect next year.  XM has some additional space and could
produce the units for the following per-unit costs (based on 15,000
units):
Direct materials
$18
Direct labor
$12
Variable manufacturing overhead
$10
If XM purchases the units from the supplier, XM can rent out the
plant for $22,500 per year.
Required:
a.  Should XM Company buy the part externally or make it
internally? Use differential analysis to support your answer.
b.  If any costs were excluded from the analysis, briefly
explain why each cost was not used in the analysis.

Added by Domingo H.

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