Questions 2 and 3 refer to the following problem: X Company is considering buyin
ID: 2452959 • Letter: Q
Question
Questions 2 and 3 refer to the following problem:
X Company is considering buying a part next year that they currently make. This year's per-unit production costs for 3,200 units were:
A company has offered to supply this part for $12.24 per unit. If X Company buys the part, $9,158 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 3,200 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?
4. X Company is considering buying a part next year that they currently produce. A company has offered to supply this part for $16.99 per unit. This year's total production costs for 57,000 units were:
Of the total overhead costs, $96,900 were fixed, and $59,109 of these fixed overhead costs are unavoidable. If X Company buys the part, the resources that were used for production can be rented out for $75,000. Production next year is expected to increase to 60,050 units.
4) If X Company buys the part instead of making it, it will save:___________
Materials $3.09 Direct labor [all variable] 3.23 Variable overhead 3.60 Fixed overhead 5.40 Total production costs $15.32Explanation / Answer
X company a. Current Cost details Units 3200 Details per unit Total Amt$ Materials 3.09 9,888 Direct Labor 3.23 10,336 Var. OH. 3.6 11,520 Fixed OH 5.4 17,280 Total prod cost 15.32 49,024 Offer for supply Units 3200 Details per unit Total Amt$ Purchase cost 12.24 39,168 Add :Unavoidable Fixed OH 8,122 Less :Additional Contribution (2,200) Net cost of offer 45,090 2 Saving from buying instead of making $ 3,934.00 Suppose at production level x there is decision indifference Assuming fixed cost situation remains same cost of making = 9.92*x+17280 Cost of buy= 12.24*x+8122-2200 So, 9.92x+17280=12.24x+8122-2200 2.32x=11358 x=4896 units 3 So at approx 4896 units , there will be indifference between make & buy 4 Production data Current Production Next years production Units 57,000.00 units 60,050 Details per unit Total Amt $ per unit Total Amt $ Materials 6.600 376,200 6.60 396,330 Direct Labor 5.200 296,400 5.20 312,260 Variable OH 3.600 205,200 3.60 216,180 Fixed OH 96,900 96,900 Total Making cost 974,700 1,021,670 Supply Offer Purchase cost 16.99 1,020,250 Add :Unavoidable Fixed OH 59,109 Less :Rental income (75,000) Net cost of offer 1,004,359 Saving from buying instead of making in nest year $ 17,312
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