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 3,300 units were:

A company has offered to supply this part for $12.76 per unit. If X Company buys the part, $9,445 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 3,300 units.

1) If X Company buys the part instead of making it, it will save _______

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

Materials $2.90 Direct labor [all variable] 3.06 Variable overhead 4.30 Fixed overhead     5.40 Total production costs $15.66

Explanation / Answer

1) Differential analysis :

If X Company buys the part instead of making it, it will save 3195

2) Indifferent point :

Manufacturing cost = Purchase cost

10.26X+11445 = 12.76 X

X(indifferent point) = 4578 units

Make Buy Direct material 9570 Direct labour 10098 Variable overhead 14190 Fixed overhead 9445 Opportunity cost 2000 Purchase cost 42108 Total 45303 42108

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