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	Total
Direct materials		$3.41	$11,935
Direct labor		4.65	16,275
Variable overhead		2.50	8,750
Fixed overhead		6.00	21,000
Total		$16.56	$57,960

A company has offered to supply this part to X Company for $13.71 per unit. If X Company accepts the offer, it will still incur fixed costs of $10,290, but it will be able to lease the resources that will become available from not making the part for $2,800. At what production level would X Company be indifferent between making and buying the part next year?

Answer 1

Let the number of units sold be S.

Total cost to make = (S X $10.56) + $21,000

Total cost to buy = (S X $13.71) + $10,290 - $2,800

(S X 10.56) + $21,000 =

(S X $13.71) + $10,290 - $2,800

10.56S + $21,000 = $13.71S + $7,490

$21,000 - $7,490 = $13.71S - $10.56S

$13,510 = $3.15S

S = $13,510 / $3.15

S = 4289 units