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 3,000 units were:

A company has offered to supply this part for $11.73 per unit. If X Company buys the part, $6,438 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 $2,300. Production next year is also expected to be 3,000 units.

At what production level would X Company be indifferent between making and buying the part?

Explanation / Answer

Answer

2.86x(material cost) + 3.68x(labor cost) + 2.7x(variable overhead) + 11100(fixed overhead)
=9.24x + 11100 [Equation 1]

* If the parts are purchased, variable cost of production will not be incurred, rather $11.73 per part will be purchase cost. Fixed cost will be reduced by $6438 and there will be net gain of $2300 (as given in question)

Hence, net cost will be: 11.73x + (11100-6438=Fixed cost) – 2300(Additional gain)
=11.73x + 4662 – 2300 = 11.73x + 2362 [Equation 2]

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