1:38 PM s4.lite.msu.edu l Verizon X Company is considering buying a part next ye

Question

1:38 PM s4.lite.msu.edu l Verizon 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: $3.92 Materials Direct labor [all variable] Variable overhead Fixed overhead3.40 Total production $14.87 costs 3.80 A company has offered to supply this part for $13.95 per unit. If X Company buys the part, $5,100 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 $2,000. Production next year is also expected to be 3,000 units 2. If X Company continues to make the part instead of buying it, it will save Submit AnswerTries 0/3 3. At what production level would X Company be indifferent between making and buying the part? Submit AnswerTries 0/3

Explanation / Answer

INCREMENTAL INCOME Savings in cost Cost of buying the part (3000 units @ 13.95) 41,850 Less: Rental icnome from idle capacity 2,000 39,850 Less: Savins in cost Material (3000 units @3.92) 11,760 Labour (3000 units @ 3.75) 11,250 Variable OH (3000 units @ 3.80) 11,400.00 Avoidable fixed cost 5,100 Net increase in income 340 . Req 2: Additional variable cost per unit incurred on buying: (13.95-11.47)= $2.48 per unit Savings in fixed cost and earning contribution=5100+2000= $7100 Number of units for break eve= Savings /Additional VC per unit = 7100/2.48 = 2863 units

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