X Company is considering buying a part next year that they currently make. This
ID: 2453090 • Letter: X
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 $13.17 per unit. If X Company buys the part, $8,289 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 $2,700. Production next year is also expected to be 3,400 units.
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?
Materials Direct labor [all variable] Variable overhead Fixed overhead Total production costs $3.92 4.19 2.70 4.60 $15.41Explanation / Answer
(1) If company buy it then buying cost is 3400 x $13.17 = $44778
If company produce it then production cost (3400 x 10.81) + $8289 + $2700 = $47743
Thus If X Company buys the part instead of making it, it will save $47743 – $44778 = $2965
(2) At what production level would X Company be indifferent between making and buying the part;
2965 / (13.17 – 10.81) = 1256 units approx. thus production should be 3400 units + 1256 units = 4656 Units
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