Question

X Company is considering buying a part in 2020 that it made in 2019. For 2020, the budgeted production cost function is $10.35X + $11,700, where X is the number of units produced. A company has offered to supply this part to X Company for $13.55 per unit. If X Company accepts the offer, it will still incur fixed costs of $5,499, and it will not be able to do anything with the resources that were used to produce the part. In 2019, 3,000 units of the part were produced; in 2020, 3,300 units will be needed.

1. If X Company makes the part in 2020 instead of buying it, it will save how much?

2. At what production level would X Company be indifferent between making and buying the part in 2020?

Answer 1

Calculating Incremental Income or loss Particulars Make Buy Increase/(Decrease) Variable cost 341551 -34155 Fixed cost 117005499 -6201 Purchase 44715 44715 Total cost L 45855) 50214 4359 1 If company makes the product can save $ 4359 2 At indifference profit total cost is same >>Let 'X'be units sold >> 10.35 X + 11700 = 13.55 X + 5499. >> X = 1938 Units. At 1938 Units company can sell or buy the product