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		$2.84	$9,656
Direct labor		3.21	10,914
Variable overhead		4.40	14,960
Fixed overhead		3.40	11,560
Total		$13.85	$47,090

A company has offered to supply this part to X Company for $13.70 per unit. If X Company accepts the offer, it will still incur fixed costs of $6,127, but it will be able to lease the resources that will become available from not making the part for $2,600. At what production level would X Company be indifferent between making and buying the part next year?

Answer 1

	Per unit		Total 3400 units
	Make	Buy	Make	Buy
Direct materials	2.84		9656
Direct labor	3.21		10914
Variable overhead	4.40		14960
Avoidable fixed overhead			5433
Opportunity cost			2600
Outside Purchase cost		13.70		46580
Total cost	10.45	13.70	43563	46580
Difference in cost = 46580-43563 = 3017
Decrease in production level = 3017/(13.70-10.45)= 928
Indifferent production level = 3400-928= 2472
2,472 is correct answer