Question

X Company is considering buying a part next year that they currently make. This year's production costs for 3,300 units were as follows:

Per-Unit Total   

Direct materials $2.87 $9,471

Direct labor 3.69 12,177

Variable overhead 3.00 9,900

Fixed overhead 4.40 14,520

Total $13.96 $46,068

A company has offered to supply this part to X Company for $12.79 per unit. If X Company accepts the offer, it will avoid fixed costs of $7,405, and it will be able to lease the resources that will become available from not making the part for $2,800. At what production level would X Company be indifferent between making and buying the part next year?

A: 1,786 B: 2,376 C: 3,160 D: 4,202 E: 5,589 F:

Answer 1

Variable cost per unit of production
Direct Material	$         2.87
Direct Labor	$         3.69
Variable overhead cost	$         3.00
Total	$         9.56
avoidable fixed cost	$       7,405
Buying cost per unit	$       12.79
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
($12.79*X) -2800 =($9.56*X) +7405
12.79X -2800 =9.56X +7405
12.79X-9.56X =7405+22800
X =3160
Number of units =3160
Correct Option = C.3160