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		$3.03	$10,605
Direct labor		3.13	10,955
Variable overhead		4.20	14,700
Fixed overhead		5.50	19,250
Total		$15.86	$55,510

A company has offered to supply this part to X Company for $13.77 per unit. If X Company accepts the offer, it will still incur fixed costs of $9,818, but it will be able to lease the resources that will become available from not making the part for $2,800. At what production level would X Company be indifferent between making and buying the part next year?

Answer 1

	Per unit		Total 3500 units
	Make	Buy	Make	Buy
Direct materials	3.03		10605
Direct labor	3.13		10955
Variable overhead	4.20		14700
Avoidable fixed overhead			9432
Opportunity cost			2800
Outside Purchase cost		13.77		48195
Total cost	10.36	13.77	48492	48195
Difference in cost = 48492-48195 = 297
Increase in production level = 297/(13.77-10.36)= 87
Indifferent production level = 3500+87 = 3587
3,587 is correct answer