Question

X Company is considering buying a part next year that they currently make. This year's production costs for 3,500 units were as follows:

		Per-Unit	Total
Direct materials		$3.77	$13,195
Direct labor		3.24	11,340
Variable overhead		2.60	9,100
Fixed overhead		3.40	11,900
Total		$13.01	$45,535

A company has offered to supply this part to X Company for $13.09 per unit. If X Company accepts the offer, it will avoid fixed costs of $5,950, and it will be able to lease the resources that will become available from not making the part for $2,000. At what production level would X Company be indifferent between making and buying the part next year?

A: 1,462

B: 1,828

C: 2,284

D: 2,856

E: 3,570

F: 4,462

Answer 1

	Per unit		Total 3500 units
	Make	Buy	Make	Buy
Direct materials	3.77		13195
Direct labor	3.24		11340
Variable overhead	2.60		9100
Avoidable fixed overhead			5950
Opportunity cost			2000
Outside Purchase cost		13.09		45815
Total cost	9.61	13.09	41585	45815
Difference in cost = 45815-41585 = $4230
Decrease in production level = 4230/(13.09-9.61)= 1216
Indifferent production level = 3500-1216= 2284
Option C 2,284 is correct answer