Question

X Company is considering buying a part next year that it currently makes. A company has offered to supply this part for $14.90 per unit. This year's total production costs for 53,000 units were:

Materials	$275,600
Direct labor	275,600
Total overhead	206,700

$132,500 of X Company's total overhead costs were variable; $27,454 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 57,950 units.

4. 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

Answer,	X company Production next year is expected to increase to 57,950 units. 1.Calculation of Cost If the Parts are Make by Company						No.of Parts:-	57950 units of Parts
		Particulars	Cost per Unit	Workings	Total Cost
		Material	5.00	$275600/53000Units	289,750
		Direct Labour	5.00	$275600/53000Units	289,750
		Variable OH	2.50	$206700/53000Units	144,875
		Fixed OH	-	$206700 - $132500	74,200
		TOTAL			798,575
	2.Calculation of Cost If the Parts are Purchase from Outside
	i)	Purchase price per unit	$14.90
	ii)	Total Purchase cost ($14.90 * 57950 Units)	$863,455
	iii)	Unavoidable Fixed Cost (Total Fixed Cost - Avoidable Fixed Cost)
		($74200 -$27454)	$46,746
	iv)	Total Cost (ii + iii)	$910,201
	3.Since the Cost of Purchase from outside are higher than the cost of making the parts by the company ,and the company has an oppurtunity to negotiate the purchase price with the supplier,Negotiate price shall be
		$798575 / 57950 Units	$13.78
	Note:- The company is ready for making the payment Maximum of $7,98,575 for purchase of 57950 parts because it is the cost for making the parts by the company its own.