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		$2.79	$9,486
Direct labor		3.19	10,846
Variable overhead		3.30	11,220
Fixed overhead		5.20	17,680
Total		$14.48	$49,232

A company has offered to supply this part to X Company for $12.66 per unit. If X Company accepts the offer, it will avoid fixed costs of $9,724, and it will be able to lease the resources that will become available from not making the part for $2,000. At what production level would X Company be indifferent between making and buying the part next year?

Answer 1

Let the production level be P

Direct materials + Direct labor + Variable overhead + Avoidable fixed overhead + Opportunity cost of lease = ($12.66 * P)

($2.79 * P) + ($3.19 * P) + ($3.3 * P) + $9,724 + $2,000 = ($12.66 * P)

$3.38 * P = $11,724

Production = 3,469 (rounded to 0 decimal places)