X Company is considering buying a part next year that they currently make. This

Question

X Company is considering buying a part next year that they currently make. This year's per-unit production costs for 3,300 units were:

A company has offered to supply this part for $12.90 per unit. If X Company buys the part, $7,273 of the fixed overhead can be avoided. Also if X Company buys the part, it can use the freed-up resources to increase production of another product, resulting in additional contribution margin of $2,200. Production next year is also expected to be 3,300 units.

2. If X Company buys the part instead of making it, it will save

3. At what production level would X Company be indifferent between making and buying the part?

Explanation / Answer

Profit on making the part Units 3300 units Material 3.06 Direct labour 3.42 Variable Overhead 4 Fixed Overheads 3.8 Total Production cost 14.28 Total Cost 3300*14.28 47124 If purchased Total Cost 12.9*3300 42570 Saving in fixed cost 5267 3.8*3300-7273 Extra Contribution Margin -2200 Total Net Cost 45637 Savings if purchased 47124-45637 1487

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