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: Materials Direct labor (all variable Variable overhead Fixed overhead Total production costs $2.31 4.55 2.50 $14.56 A company has offered to supply this part for $11.80 per unit. If X Company buys the part, s9,282 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. Production next year is also expected to be 3,500 units. Spt2. If X Company buys the part instead of making it,it will save S plis. At what production level mould Company be indifent betwen making and buying the part? 3. AO 4,829 BO 7,002 CO 10,152 DO 14,721 EO 21,345 FO 30,951

Explanation / Answer

Calculate relevant cost :

2) Answer is b) $3242

3) Indifferent point :

Manufacturing cost=purchase cost

9.36X+2500+9282 = 11.80X

-2.44X = -11782

X = 4829

so answer is a) 4829

Make Buy Variable manufacturing cost (2.31+4.55+2.50)*3500 32760 Fixed manufacturing cost 9282 Opportunity cost 2500 Purchase cost (11.80*3500) 41300 Total relevant cost 44542 41300

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