Question

X Company is considering buying a part next year that it currently makes. This year's production costs for 3,400 units were:

		Per-Unit	Total
Direct materials		$3.79	$12,886
Direct labor		4.56	15,504
Variable overhead		3.90	13,260
Fixed overhead		3.20	10,880
Total		$15.45	$52,530

A company has offered to supply this part for $16.22 per unit. $4,461 of X Company's fixed overhead are allocated costs that will occur even if they buy the part. But if X Company buys the part, it can rent out the freed-up resources for $2,700. Production next year is expected to be 3,900 units.

1. If X Company continues to make the part instead of buying it, it will save

2. At what production level would X Company be indifferent between making and buying the part?

Answer 1

hi, please find below the answer let me know if you need any clarification -

			Per-Unit	Total
	Direct materials		$3.79	$12,886
	Direct labor		4.56	15,504
	Variable overhead		3.9	13,260
	Fixed overhead		3.2	10,880
	Total		$15.45	$52,530
Answer a)
	Computation of cost of making
	Total variable cost (3.79+4.56+3.9)*3900		47775
	Avoidable fixed cost (10880-4461)		6,419
	Opportunity cost of renting		2700
	Total making cost		56894
	Total unit		3900
	Per unit cost		$      14.59
	Unit cost of buying		$      16.22
	Total saving (if making inhouse)		$ 6,364.00
	=(16.22-14.59)*3900
Answer b)
	In order to be indifferent unit cost of making has to be = 16.22
	Total variable cost of making =		$12.25
	Total fixed cost + Opportunity cost of making = 2700+6419		9,119
	Lets assume indifference quantity = x
	Therefor X*12.25+9119 = X*16.22
	3.97X=	9119
	X	2,297
	Hence, at total unit of 2297(Appx) company will be indifferent