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		$3.76	$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?

Answer 1

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