Question

X Company is considering buying a part next year that it currently makes. A company has offered to supply this part for $15.34 per unit. This year's total production costs for 59,000 units were:

Materials	300,900
Direct Labor	241,900
Total overhead	383,500

$265,500 of X Company's total overhead costs were variable; $34,220 of X Company's fixed overhead costs can be avoided if it buys the part. If X Company buys the part, there are no alternative uses of the resources that were used for its production. Production next year is expected to increase to 63,850 units.

1.If X Company continues to make the part instead of buying it, it will save

2. X Company has an opportunity to negotiate the purchase price with the supplier. What purchase price would make X Company indifferent between making and buying?

Answer 1

	Given that-
	Unit produced =		59,000
			Per-Unit	Total
	Direct materials		$          5.10	$300,900
	Direct labor		$          4.10	241,900
	Variable overhead		$          4.50	265,500
	Fixed overhead cost		$          2.00	118,000
	Total		$        15.70	$926,300
Answer a)
	Computation of cost of making
	Total variable cost (5.1+4.1+4.5)*63850		874745
	Avoidable fixed cost		34,220
	Total making cost		908965
	Total unit		63850
	Per unit cost		$        14.24
	Unit cost of buying		$        15.34
	Total saving (if making inhouse)		$      70,494
	=(15.34-14.24)*63850
Answer b)
	In order to be indifferent unit cost buying has to be =		$        14.24
	At this level company will be indifferent .