Question

X Company is considering buying a part next year that they currently make. This year's production costs for 3,100 units were as follows:

		Per-Unit	Total
Direct materials		$2.74	$8,494
Direct labor		3.07	9,517
Variable overhead		2.90	8,990
Fixed overhead		5.90	18,290
Total		$14.61	$45,291

A company has offered to supply this part to X Company for $12.08 per unit. If X Company accepts the offer, it will avoid fixed costs of $9,694, and it will be able to lease the resources that will become available from not making the part for $2,700. At what production level would X Company be indifferent between making and buying the part next year?

Answer 1

	Per unit		Total 3100 units
	Make	Buy	Make	Buy
Direct materials	2.74		8494
Direct labor	3.07		9517
Variable overhead	2.90		8990
Avoidable fixed overhead			9694
Opportunity cost			2700
Outside Purchase cost		12.08		37448
Total cost	8.71	12.08	39395	37448
Difference in cost = 39395-37448 = 1947
Increase in production level = 1947/(12.08-8.71)= 578
Indifferent production level = 3100+578 = 3678
3678 is correct answer