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:

Materials $3.02

Direct labor [all variable] 3.87

Variable overhead 3.30

Fixed overhead 4.20

Total production costs $14.39

A company has offered to supply this part for $12.61 per unit.

If X Company buys the part, $7,854 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 3,400 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?

Explanation / Answer

Statement showing Benefits Particulars Make Buy Difference Materials Cost = 3.02*3400             10,268.00         10,268.00 Labour Cost = 3.87*3400             13,158.00         13,158.00 Variable Overhead =3.3*3400             11,220.00         11,220.00 Purchase Cost =12.61*3400           42,874.00       (42,874.00) Fixed Overhead               7,854.00           7,854.00 Additional Contribution           (2,000.00)           2,000.00 Total Cost             42,500.00           40,874.00           1,626.00 If X Company buys the part instead of making it, it will save 1626 Indifferent Level = Diff in FC/ Diff in VC Indifferent Level = 7854-(-2000)/(12.61 - 3.02-3.87-3.3) Indifferent Level = 9854/2.42 Indifferent Level = 4072

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