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 $11.90 per unit. If X Company buys the part, $10,514 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 3,300 units.

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

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

Materials $2.37 Direct labor [all variable] 4.64 Variable overhead 2.50 Fixed overhead     5.40 Total production costs $14.91

Explanation / Answer

1)If company makes the product ,Total cost will be = 14.91 * 3300 = $ 49203

If company buys the product ,net Total cost will be = purchase cost + fixed overhead cost - contribution from other product

    =(11.90 * 3300) + [5.40 * 3300 -   10514 ] - 2400

    = 39270+ [17820-10514] - 2400

     = 39270 + 7306 - 2400

       = 44176

savings = 44176 - 49203 =$ 5027

2)At indifference point ,the total cost under both option will be equal .

let X be the number of units at indifference point

[X   (14.91 - 5.4 ) + (5.4*3300 )]    =    (11.90 X + 730 6 - 2400]

[9.51X + 17820 ] = 11.90X + 4906

11.90X -9.51X = 17820 -4906

      2.39 X =    12914

        X = 12914/ 2.39

            = 5403 Units approx

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