Question

X Company is considering buying a part next year that it currently makes. A company has offered to supply this part for $17.44 per unit. This year's total production costs for 56,000 units were: Materials $364,000 Direct labor 274,400 Total overhead 336,000 $252,000 of X Company's total overhead costs were variable; $30,240 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 60,450 units. 3. If X Company continues to make the part instead of buying it, it will save Tries 0/3 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

	MAKE	BUY
Number of units to Buy or Make	60,450	60,450
Direct Material cost $ 3,64,000*60,450/56,000	3,92,925	----
Direct labour cost $ 2,74,400*60,450/56,000	2,96,205	----
Veriable overhead 2,52,000*60,450/56,000	2,72,025	---
Fixed overhead cost	84,000	53,760
oppurtunity cost	---	---
Purchase cost (17.44$*60,450units)	---	10,54,248
Total cost	10,45,155	11,08,008

INCREASE IN COST DUE TO BUY=11,08,008-10,45,155

i.e 62,853$

Cost per unit if we make=10,45,155/60,450units

i.e 17.29$

calculation of bargaining price

(TOTAL COST AT BUY - EXCESS COST OF BUY INSTED OF MAKE - UN AVOIDABLE FIXED COST)/60,450UNITS

(11,08,008-62,853-53,760)/60,450units=16.4$

unavoidale fixed cost per unit if BUY=53,760$/60,450units=0.89$

so total cost per unit at BUY=16.4+0.89 i.e 17.29$

Note:un avoidable fixed cost=84,000-30,240

=53,760$ this should be incurred even if BUY from outside supplier