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 3,400 units were:

A company has offered to supply this part for $13.77 per unit. If X Company buys the part, $9,027 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 3,400 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

Solution: Make Buy for 3400 units Units 3400units @ per unit Materials $3.44 $11,696.00 Direct labor [all variable] 3.48 $11,832.00 Variable overhead 4.5 $15,300.00 Fixed overhead =13.77-4.5 9.27 $31,518.00 Total units $20.69 $70,346.00 Fixed Overhead =9.27x3400= 31,518 X Company Make (3.44 +3.48 + 4.5+9.27)(3400) + 31,518 20.69*3400=70,346 + 31,518 = $101,864 X Company Make $101,864 A company has offered to supply this part for $13.77 per unit. If X Company buys the part, $9,027 of the fixed overhead can be avoided. X Company Buy $9,027+ 31518 = $40,545 X Company Make - X Company Buy $101864 - $40545 $61,319 X Company will save $61,319 3. At what production level would X Company be indifferent between making and buying the part? 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 3,400 units. Unavoidable fixed costs 70346 - 61319 = $9027+2200= $11,227 X Company = $11,227 level of demand

Related Questions

Navigate

• Browse (All)
• Browse X
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.