Question

X Company is considering buying a part next year that they currently make. This year's production costs for 3,000 units were as follows:

		Per-Unit	Total
Direct materials		$3.41	$10,230
Direct labor		3.46	10,380
Variable overhead		4.20	12,600
Fixed overhead		4.80	14,400
Total		$15.87	$47,610

A company has offered to supply this part to X Company for $14.22 per unit. If X Company accepts the offer, it will avoid fixed costs of $7,776, 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

Let S be the number of units sold.

Cost to make = $11.07S + $14,400

Cost to buy = $14.22S + ($14,400 - $7,776) - $2,100

$11.07S + $14,400 = $14.22S + ($14,400 - $7,776) - $2,100

$14,400 - $4,524 = $14.22S - $11.07S

$9,876 = $3.15S

S = 3,135 units