Question

Company currently buys a part from a supplier for $13.55 per unit but is considering making the part itself next year. This year, they purchased 3,000 units of this part. Estimated costs to make the part are:

		Per-Unit	Total
Direct materials		$2.60	$7,800
Direct labor		4.75	14,250
Variable overhead		4.10	12,300
Fixed overhead		4.50	13,500
Total		$15.95	$47,850

Of the estimated fixed overhead, $5,130 are common costs that would be allocated to the part; the rest would be additional fixed overhead costs. X Company currently rents unused factory space to a tenant for $2,900; it will have to use this space to make the part.

2. If X Company will need 3,000 units again next year and continues to buy the part instead of making it, it will save

3. X Company is somewhat uncertain how many units of the part it will need next year. How many units would make the company indifferent between continuing to buy the part and making it?

Answer 1

2) Differential analysis

	Make	Buy
Direct material	7800
Direct labor	14250
variable manufacturing overhead	12300
Fixed manufacturing overhead (13500-5130)	8370
Opportunity Cost	2900
Purchase cost (3000*13.55)		40650
Total relevant cost	45620	40650

it will save = 45620-40650 = $4970

3) relevant cost of manufacturing = relevant cost of buying

11.45X+8370+2900 = 13.55X

-2.10X = -11270

X(Indifferent point) = 11270/2.1 = 5367 Units