Question

X Company is considering buying a part next year that they currently make. This year's per-unit production costs for 3,500 units were:

Materials	$3.81
Direct labor [all variable]	4.06
Variable overhead	3.40
Fixed overhead	3.10
Total production costs	$14.37

A company has offered to supply this part for $13.69 per unit. If X Company buys the part, $6,184 of the fixed overhead can be avoided. Also if X Company buys the part, it can use the freed-up resources to increase production of another product, resulting in additional contribution margin of $2,800. Production next year is also expected to be 3,500 units.

2. If X Company buys the part instead of making it, it will save

Tries 0/3

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

Answer 1

2

If X Company buys the part instead of making it, it will save =$528.37

Working notes for the above answer:

	make	Buy	Increase/ decrease
Materials	13335		13335
Direct labor [all variable]	14210		14210
Variable overhead	11900		11900
Fixed overhead	10850	4666	6184
Total production costs	14.37		14.37
Purchase price		47915	-47915
Total Annual cost	50309.37	52581	-2271.63
Less: opprtunity cost		-2800	2800
Total cost	50309.37	49781	528.37

3

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

Total cost of making = (3.81+4.06+3.40) xQ + 6184 + 2800

Total cost of buying = $13.69Q

The company will be irrelevant about buying or making the parts when,

Total cost of making = total cost of buying

(3.81+4.06+3.40) xQ + 6184 + 2800= 13.69 Q

11.27 Q+8984 =13.69Q

2.42Q=8984

Q=8984/2.42

Q=3712 units