Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $16.00 per unit. This year, total costs to produce 53,000 units were:

Direct materials			$307,400
Direct labor			222,600
Variable overhead			222,600
Fixed overhead			63,600

If X Company buys the part, it can avoid $23,532 of the fixed overhead. The resources that will become idle if they choose to buy the part can be used to increase production of another product, resulting in additional total contribution margin of $60,000.

The marketing manager is uncertain what demand will be next year. What level of demand will make the company indifferent between making the part and buying it?

Answer 1

Answer : At 46607 units level of of demand the company will be indifferent between making the part and buying it

it is calculated as below

Total Variable Cost of 53000 units = Direct Material +Direct labor+Variable overhead

= $307400+$222600+$222600

=$752600

Per Unit Variable cost = $752600/53000 = $14.20

So $14.20 is the per unit relevant cost in deciding whether to buy the product or make it

Buying price per unit = $16

Extra cost per unit to be paid for buying the product = $16-$14.20 = $1.80

Let X units to be the level of units where it will be indifferent to buy or make the product

At X level total benefit will be zero from buying or making the product

so it can be written as

Extra cost-Avoidable fixed cost-additional income from other product = 0

1.80X-$23532-$60000 = 0

1.80X = 23532+60000 = $83532

x = 83532/1.80 = 46406.66 units rounded off to 46407 Units

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