Question

X Company is considering buying a part next year that they currently make. This year's production costs for 3,100 units were as follows:

		Per-Unit	Total
Direct materials		$3.96	$12,276
Direct labor		3.18	9,858
Variable overhead		4.20	13,020
Fixed overhead		3.90	12,090
Total		$15.24	$47,244

A company has offered to supply this part to X Company for $13.84 per unit. If X Company accepts the offer, it will avoid fixed costs of $5,440, and it will be able to lease the resources that will become available from not making the part for $2,700. Next year's expected production level is 3,500 units.

11. If X Company makes the part next year instead of buying it, it will save

Tries 0/3

12. At what production level would X Company be indifferent between making and buying the part next year?

Answer 1

	Relevant Cost
Item	Make	Buy	Saving due to Buying
Direct Material	13,860
Direct Labor	11,130
Variable Manufacturing Overhead	14,700
Fixed manufacturing Overhead	5,440
Cost of purchsing from outside supplier		48,440
Lease income fro resources		(2,700)
Total Cost	45,130	45,740	(610)
11. If X Company buys the part next year instead of making it, it will save $610
Q.12
Let the production level be X
Cost of buying = cost of manufacturing
x * (3.96 +3.18+ 4.2) + 5440 = 45740
X = 3554 Units