Question

In: Accounting

X Company is considering buying a part next year that they currently make. This year's production...

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 $3.76     $11,656  
Direct labor 4.26     13,206  
Variable overhead 2.70     8,370  
Fixed overhead 4.60     14,260  
Total $15.32    $47,492


A company has offered to supply this part to X Company for $13.98 per unit. If X Company accepts the offer, it will still incur fixed costs of $7,130, but it will be able to lease the resources that will become available from not making the part for $2,900. At what production level would X Company be indifferent between making and buying the part next year?

Solutions

Expert Solution

We have to found variable cost per unit
Variable cost per unit of production
Direct Material $         3.76
Direct Labor $         4.26
Variable overhead cost $         2.70
Total $       10.72
avoidable fixed cost $       7,130
($14260-7130)
Buying cost per unit $       13.98
We can form an equation as follows to reach indifferent point in units
Let us assume number of parts be X
(Buying cost per unit * number of units) - Income from lease = ( variable cost of production per unit * number of units ) + Avoidable fixed cost
($13.98*X) -2900 =($10.72*X) +7130
13.98X -2900 =10.72X +7130
13.98X-10.72X =7130+2900
X =3077
Number of units =3160

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