Question

X Company currently makes a part and is considering buying it next year from a company that has offered to supply it for $16.11 per unit. This year, total costs to produce 60,000 units were Direct materials Direct labor Variable overhead Fixed overhead $348,000 312,000 192,000 90,000 If X Company buys the part, it can avoid $21,600 of the fixed overhead. The resources that will become idle if they choose to buy the part can be used to increase production of another product, resulting in additional total contribution margin of $70,000 The marketing manager is uncertain what demand will be next year. What level of demand will make the company indifferent between making the part and buying it? Submit Answer Tries 0/3

Answer 1

	Per unit		Total 60000 units
	Make	Buy	Make	Buy
Direct materials	5.8		348000
Direct labor	5.2		312000
Variable overhead	3.2		192000
Avoidable fixed overhead			21600
Opportunity cost			70000
Outside Purchase cost		16.11		966600
Total cost	14.2	16.11	943600	966600
Savings in cost = 966600-943600 = 23000
Decrease in production level = 23000/(16.11-14.2)= 12042
Indifferent production level = 60000-12042= 47958
Indifferent production level = 47958