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		$2.86	$9,724
Direct labor		3.71	12,614
Variable overhead		2.70	9,180
Fixed overhead		4.70	15,980
Total		$13.97	$47,498

A company has offered to supply this part to X Company for $12.56 per unit. If X Company accepts the offer, it will avoid fixed costs of $7,670, 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?

Tries 0/3

Answer 1

	Per unit		Total 3400 units
	Make	Buy	Make	Buy
Direct materials	2.86		9724
Direct labor	3.71		12614
Variable overhead	2.70		9180
Avoidable fixed overhead			7670
Opportunity cost			2700
Outside Purchase cost		12.56		42704
Total cost	9.27	12.56	41888	42704
Difference in cost = 42704-41888 = 816
Decrease in production level = 816/(12.56-9.27)= 248
Indifferent production level = 3400-248 = 3152
3152 is correct answer