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 productiorn costs for 3,100 units were: $2.57 Materials Direct labor [all variable] Variable overhead Fixed overhead 3.20 Total production 13.64 costs 3.00 A company has offered to supply this part for $12.87 per unit. If X Company buys the part, $5,456 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 $2,400. Production next year is also expected to be 3,100 units 2. If X Company buys the part instead of making it, it will save Submit Answer Tries 0/3 3. At what production level would X Company be indifferent between making and buying the part?

Explanation / Answer

Per unit 3100 units Make Buy Make Buy Materials 2.57 7967 Direct labor 4.87 15097 Variable overhead 3 9300 Fixed overhead 5456 Purchase cost 12.87 39897 Opportunity cost 2400 Total 40220 39897 If X Company buys the part instead of making it, it will save $323(39897-40220) 3 Indifference point=3100+(323/(12.87-2.57-4.87-3))= 3233

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