Question

X Company is considering buying a part next year that they currently make. This year's production costs for 3,400 units were as follows:

		Per-Unit	Total
Direct materials		$3.02	$10,268
Direct labor		3.62	12,308
Variable overhead		3.40	11,560
Fixed overhead		5.10	17,340
Total		$15.14	$51,476

A company has offered to supply this part to X Company for $13.30 per unit. If X Company accepts the offer, it will avoid fixed costs of $8,150, and it will be able to lease the resources that will become available from not making the part for $2,100. At what production level would X Company be indifferent between making and buying the part next year?

A: 1,610

B: 2,012

C: 2,515

D: 3,144

E: 3,930

F: 4,913

Answer 1

	Per unit		Total 3400 units
	Make	Buy	Make	Buy
Direct materials	3.02		10268
Direct labor	3.62		12308
Variable overhead	3.40		11560
Avoidable fixed overhead			8150
Opportunity cost			2100
Outside Purchase cost		13.30		45220
Total cost	10.04	13.30	44386	45220
Difference in cost = 44386-45220 = 834
Decrease in production level = 834/(13.30-10.04)= 256
Indifferent production level = 3400-256= 3144
Option D 3,144 is correct answer