Question

X Company is considering buying a part in 2020 that it has been making for the past several years. A company has offered to supply this part for $15.73 per unit. Budgeted production in 2020 is 56,000 units, and budgeted per-unit production costs are: Materials Direct labor [all variable] Total overhead Total $5.20 5.60 5.00 $15.80 $106,400 of X Company's total overhead costs are fixed; $74,480 of the $106,400 are unavoidable even if it buys the part. Also, if X Company buys the part, it can rent the equipment that was used to make the part to another company for $70,000. 3. If X Company continues to make the part instead of buying it, it will save * Tries 0/3 4. At what production level would X company be indifferent between making and buying the part? * Tries 0/3

Answer 1

3) Differential analysis

	Make	Buy
Direct material	291200
Direct labor	313600
Variable overhead	173600
Fixed overhead	31920
Opportunity Cost	70000
Purchase cost		880880
Total relevant cost	880320	880880

it will save = 880880-880320 = 560

2) Indifferent point

Manufacturing cost = Buying cost

13.90X+101920 = 15.73X

-1.83X = 101920

X(Unit) = 55694 Units