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 $15.89 per unit. This year, per-unit production costs to produce 54,000 units were: Direct materials Direct labor Overhead Total $5.00 5.70 4.70 $15.40 $183,600 of the total overhead costs were variable; $16,848 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 $75,000. Production next year is expected to increase to 57,900 units. 3. If X Company continues to make the part instead of buying it, it will save Submit Answer Tries 0/5 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? Submit Answer Tries o/s

Explanation / Answer

Answer to 3

Per Unit Overhead = (183600/54000) = 3.40

Answer to 4

Let at Q units both option are indifferent

Total Cost under Making = Total Cost under buying

(5 + 5.70 + 3.40) x Q + 16848 = Q x 15.89 - 75000

14.10Q + 16848 = 15.89Q - 75000

16848 + 75000 = 15.89Q - 14.10Q

Q = 51312 Units

at 51312 units both option would be indifferent

Make Amt Buy Amt Direct Material (5 x 57900) 289500 Cost of Purchase (57900 x 15.89) 920031 Direct Labor (5.70 x 57900) 330030 Rent Income -75000 Variable Overhead (57900 x 3.40) 196860 Relevant Fixed Cost 16848 Total Cost 833238 845031 Savings (920031-833238) 11793

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