X Company currently makes a part and is considering buying it from a company has

Question

X Company currently makes a part and is considering buying it from a company has offered to supply it for $16.36 per unit. This year, per-unit production costs to produce 50,000 units were:

$220,000 of the total overhead costs were variable; $24,000 of the fixed overhead costs can be avoided if X Company buys the part. In addition, the resources that were used for production can be rented to another company for $70,000. Production next year is expected to increase to 54,950 units.

3. If X Company continues to make the part instead of buying it, it will save

4. X Company is uncertain about next year's production level. At what production level will the company be indifferent between making and buying the part?

Explanation / Answer

3. If the company buys:

Cost = 54950*16.36 + non-avoidable fixed costs - rent

= 898982 + (6*50000-220000-24000) - 70000

= 884982

If the company produces, the costs are

= 54950*(5.9+4.1 + 220000/50000) + (300000-220000)

= 871280

Company will save = 884982-871280 = 13702

4.

Equating both the costs as equal with units as X.

X*16.36 + (6*50000-220000-24000) - 70000

= X*(5.9+4.1 + 220000/50000) + (300000-220000)

X = 47960

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