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 3,400 units were:

A company has offered to supply this part for $12.17 per unit. If X Company buys the part, $5,780 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 3,400 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?

Materials $2.56 Direct labor [all variable] 3.65 Variable overhead 3.60 Fixed overhead     3.40 Total production costs $13.21

Explanation / Answer

Solution 2:

Yes, company will save on buying the parts and net annual saving = $156.

Solution 3:

Variable cost per unit of manufacturing = $2.56 + $3.65 + $3.60 = $9.81

Buying cost per unit = $12.17

Difference in variable cost = $12.17 - $9.81 = $2.36

Total fixed and opportunity cost saving on buying = $5,780 + $2,400 = $8,180

Production level at which X company be indifferent between making and buying the part = $8,180 / $2.36 = 3466 units

Differential Analysis - Making Parts (alt 1) or Buying Parts (Alt2) - X Company Particulars Making Parts (Alt 1) Buying Parts (Alt 2) Financial advantage (Disadvantage) of buying (Alternative 2) Costs: Purchase Price (3400*$12.17) $0.00 $41,378.00 -$41,378.00 Direct material $8,704.00 $0.00 $8,704.00 Direct Labor $12,410.00 $0.00 $12,410.00 Variable overhead $12,240.00 $0.00 $12,240.00 Avoidable Fixed Manufacturing cost $5,780.00 $0.00 $5,780.00 Opportunity cost of increase production of other product $2,400.00 $2,400.00 Total Cost $41,534.00 $41,378.00 $156.00

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