X Company is considering buying a part next year that they currently make. This
ID: 2510780 • Letter: X
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:
A company has offered to supply this part for $13.69 per unit. If X Company buys the part, $6,184 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 $2,800. Production next year is also expected to be 3,500 units.
2. If X Company buys the part instead of making it, it will save
3. At what production level would X Company be indifferent between making and buying the part?
Explanation / Answer
Answer:
2
If X Company buys the part instead of making it, it will save =$528.37
Working notes for the above answer:
make
Buy
Increase/
decrease
Materials
13335
13335
Direct labor [all variable]
14210
14210
Variable overhead
11900
11900
Fixed overhead
10850
4666
6184
Total production costs
14.37
14.37
Purchase price
47915
-47915
Total Annual cost
50309.37
52581
-2271.63
Less: opprtunity cost
-2800
2800
Total cost
50309.37
49781
528.37
3
At what production level would X Company be indifferent between making and buying the part?
Total cost of making = (3.81+4.06+3.40) xQ + 6184 + 2800
Total cost of buying = $13.69Q
The company will be irrelevant about buying or making the parts when,
Total cost of making = total cost of buying
(3.81+4.06+3.40) xQ + 6184 + 2800= 13.69 Q
11.27 Q+8984 =13.69Q
2.42Q=8984
Q=8984/2.42
Q=3712 units
make
Buy
Increase/
decrease
Materials
13335
13335
Direct labor [all variable]
14210
14210
Variable overhead
11900
11900
Fixed overhead
10850
4666
6184
Total production costs
14.37
14.37
Purchase price
47915
-47915
Total Annual cost
50309.37
52581
-2271.63
Less: opprtunity cost
-2800
2800
Total cost
50309.37
49781
528.37
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