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 3,500 units were: A company has offered to supply this part for $12.38 per unit. If X Company buys the part, $12,180 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 $2,400. Production next year is also expected to be 3,500 units. 2. If X Company buys the part instead of making it, it will save At what production level would X Company be indifferent between making and buying the part?

Explanation / Answer

2)

company will save =$ 6180 if it buy the product.

3) Let number of units be X at which company will be indifferent.

If it make ,Total cost = 15.98 X

If it buy ,Total cost = 12.38X - 12180 (Savings in fixed cost) - 2400 (cONtribution on other product)

                                = 12.38X - 14580

At indifference point The total cost should be equal

   15.98X = 12.38X -14580

   15.98X -12.38X = 14580

         3.6 X = 14580

          X = 14580 /3.6

               = 4050 Units

If Make If bought Increase /(decrease) in net income Direct material 3500*3.02 =10570 10570 Direct labor 3500 *3.66 = 12810 12810 Variable overhead 3500*3.3 = 11550 11550 Fixed overhead 3500*6 = 21000 21000-12180 =8820 12180 Purchase cost - 3500 *12.38 = 43330 (43330) contribution margin generated - 2400 2400 savings $ 6180

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