Question

X Company is considering buying a part in 2020 that it has been making for the past several years. A company has offered to supply this part for $15.48 per unit. Budgeted production in 2020 is 59,000 units, and budgeted per-unit production costs are:

Materials	$6.90
Direct labor [all variable]	4.40
Total overhead	3.60
Total	$14.90

$64,900 of X Company's total overhead costs are fixed; $38,940 of the $64,900 are unavoidable even if it buys the part. Also, if X Company buys the part, it can rent the equipment that was used to make the part to another company for $75,000.

3. If X Company buys the part instead of making it, it will save how much?

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

Answer 1

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Please find below the answer
Statement showing Computations
Particulars	Make	Buy	Total
Direct Materials = 59000*6.90	407,100.00		407,100.00
Direct Labour = 59000*4.40	259,600.00		259,600.00
Variable Overhead costs = 59000*3.60 - 64,900	147,500.00		147,500.00
Relevant Fixed costs = 64900-38940	25,960.00		25,960.00
Purchase costs = 59000*15.48		913,320.00	(913,320.00)
rent from equipment		(75,000.00)	75,000.00
	840,160.00	838,320.00	1,840.00
3. If X Company buys the part instead of making it, it will save 1,840
4.)
Variable costs per unit to make = 6.90+4.40 +147500/59000	13.80
Indifference point = (25,960 -(-75000)/(15.48-13.80)
Indifference point = 100,960/1.68
Indifference point = 60,095 units