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 total production costs for 11,400 units of this part were:

A company has offered to supply this part for $12.78 per unit. If X Company buys the part, $9,029 of the fixed overhead can be avoided, but there is no alternative use of the freed-up resources. Production next year is expected to be the same as this year.

1. The costs of making the part are less than the costs of buying the part by

2. X Company is uncertain what next year's required production will be. At what production level will X Company be indifferent between making and buying the part?

Explanation / Answer

1)
Costs For making = 44,232 + 42,750 + 35,340 + 41,040 =163,362
Cost for Buying = 12.78*11,400 + 35340 + 41040 - 9029 =213,043
Diff = 213043 - 163362 = $ 49,681
2)
(44,232+42,750 + 35,340)*x/11,400 + 41,040 = 12.78*x + 35,340*x/11,400 + 41040 - 9029
(44,232+42,750 )*x/11,400 = 12.78*x - 9029
9029 = 12.78*x - 7.63*x
x = 9029/(12.78-7.63)
1753

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