Question

X Company is considering buying a part next year that they currently make. This year's production costs for 3,500 units were as follows: Per-Unit $3.34 4.71 Direct materials Direct labor Variable overhead Fixed overhead Total Total $11,690 16,485 15,750 12,250 $56,175 4.50 3.50 $16.05 A company has offered to supply this part to X Company for $15.89 per unit. If X Company accepts the offer, it will avoid fixed costs of $5,880, and it will be able to lease the resources that will become available from not making the part for $2,100. At what production level would X Company be indifferent between making and buying the part next year?

Answer 1

Answer is given below with working.

Units are rounded off

Answer is 2,389 units Buy Make $3.34 $4.71 $4.50 Direct Material Direct Labor Variable overhead Purchase Cost Total Variable cost per unit Fixed overhead Opportunity cost Total fixed cost $15.89 $15.89 $6,370 $12.55 $12,250 $2,100 $14,350 $6,370 At indifference point cost of both options should be same Let units produced be X So 12.55X +$12,250 + $2,100 = $15.89+ $6,370 solving above equation $15.89X- $12.55X= $12,250-$6,370 3.34X = $7,980 X = 7,980/3.34= 2389 units Cross checking Buy Make $7,979 $11,252 $10,751 $12,250 Direct Material Direct Labor Variable overhead Fixed overhead Purchase Cost Annual cost Opportunity cost Total Cost $6,370 $37,961 $44,331 $42,232 $2,100 $44,332 $44,331