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 $2.42 4.98 3.50 5.90 $16.80 A company has offered to supply this part for $13.39 per unit. If X Company buys the part, $10,532 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. 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? Submit Answer Tries 0/3

Explanation / Answer

Per unit 3500 units Make Buy Make Buy Materials 2.42 8470 Direct labor 4.98 17430 Variable overhead 3.5 12250 Fixed overhead 10532 Purchase cost 13.39 46865 Opportunity cost 2500 Total 51182 46865 If X Company buys the part instead of making it, it will save $4317(51182-46865) 3 Indifference point=3500+(4317/(13.39-2.42-4.98-3.5))= 5234

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