A Company is considering buying a part next year that they currently make. This

Question

A 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 $12.38 per unit. If X Company buys the part, $12,180 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 3,500 units. If X Company buys the part instead of making it, it will save $6,180 At what production level would X Company be indifferent between making and buying the part?

Explanation / Answer

3)

Relevant Variable cost of Making = Material + Labor + Variable overhead

Relevant Variable cost of Making = 3.02 + 3.66 + 3.30

Relevant Variable cost of Making = 9.98

Avoidable Fixed Cost = $ 12180

Oppurtunity cost = Additional Contribution Margin

Oppurtunity cost = 2400

X company would be indifferent in production = (Avoidable Fixed Cost + Oppurtunity cost)/(Cost of Buying-Relevant Variable cost of Making)

X company would be indifferent in production = (12180+2400)/(12.38-9.98)

X company would be indifferent in production = 6075

Answer

X company would be indifferent in production = 6075

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