Question

X Company is considering buying a part next year that they currently make. This year's production costs for 3,400 units were as follows:

		Per-Unit	Total
Direct materials		$2.75	$9,350
Direct labor		4.03	13,702
Variable overhead		3.90	13,260
Fixed overhead		5.60	19,040
Total		$16.28	$55,352

A company has offered to supply this part to X Company for $14.05 per unit. If X Company accepts the offer, it will avoid fixed costs of $9,520, and it will be able to lease the resources that will become available from not making the part for $3,000. At what production level would X Company be indifferent between making and buying the part next year?

Answer 1

Let the indifferent point = x units

so,

Relevant Manufacturing cost = Purchase cost

(Variable cost + avoidable fixed cost + Opportunity cost ) = Purchase cost

{(2.75+4.03+3.90)*x} + 9520 + 3000 = 14.05*x

x = 3715 units

Production level on which X Company be indifferent between making and buying the part next year = 3715 units