X Company is considering buying a part next year that they currently make. This
ID: 2463054 • Letter: X
Question
X Company is considering buying a part next year that they currently make. This year's production costs for 3,000 units were: A company has offered to supply this part for $14.14 per unit. If X Company buys the part, $6,888 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 $2,500. X Company is uncertain what production will be next year. At what production level would it be indifferent between making and buying the part?Explanation / Answer
Comparative Statement of total cost
Particulars
Own
Outsource
Direct Material
3.05
Direct Labor
4.98
Variable Overhead
3.8
Variable cost per unit
$11.83
14.14
No of units
3,000
3,000
Total variable cost
35,490
42,420
Fixed cost
12,300
5,412
Total cost
47,790
47,832
(-) Contribution from another
-2,500
product
45,332
Rank
II
I
Fixed cost of outsource = 5412 – 2500 =2642
Indifferent point = Difference between Fixed cost & variable cost/Deference between variable costs
= 12,300 – 2642/14.14 – 11.83
= 9658 /2.31 = 4,180 units
Up to 4179 units outsource is beneficial. Above 4180 units own production beneficial. At 3,000 units out source better.
Comparative Statement of total cost
Particulars
Own
Outsource
Direct Material
3.05
Direct Labor
4.98
Variable Overhead
3.8
Variable cost per unit
$11.83
14.14
No of units
3,000
3,000
Total variable cost
35,490
42,420
Fixed cost
12,300
5,412
Total cost
47,790
47,832
(-) Contribution from another
-2,500
product
45,332
Rank
II
I
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