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 $13.80 per unit. If X Company buys the part, $9,818 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 $2,000. Production next year is also expected to be 3,500 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 $2.73 direct labor {all variable} 4.27 variable overhead 4.30 fixed overhead 5.50 total production costs $16.80

Explanation / Answer

If X buys the part instead of making it, it will save = (2.73 x 3500) + (4.27 x 3500) + (4.3 x 3500) + 9818 + 2000 = $51368

Ans 2 -

Cost Per unit Amount Materials 2.73 21021 Direct 4.27 32879 Variable overheads 4.3 33110 Fixed overheads 2.50 19250 Output 7700 Total 13.80 106260

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