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 $2.54 $8,890

Direct labor 4.81 16,835

Variable overhead 3.20 11,200

Fixed overhead 5.50 19,250

Total $16.05 $56,175

A company has offered to supply this part to X Company for $13.94 per unit. If X Company accepts the offer, it will avoid fixed costs of $10,202, and it will be able to lease the resources that will become available from not making the part for $2,500. 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 variable cost per unit = $2.54 + $4.81 + $3.20 = $10.55

Total cost to make = $10.55S + $19,250

Unavoidable fixed cost = $19,250 - $10,202 = $9,048

Total cost to buy = $13.94S + $9,048 - $2,500

$10.55S + $19,250 = $13.94S + $9,048 - $2,500

S = 3,747 units