Question

X Company is considering buying a part next year that it currently makes. A company has offered to supply this part for $16.06 per unit. This year's total production costs for 50,000 units were:

Materials	$250,000
Direct labor	280,000
Total overhead	270,000

$190,000 of X Company's total overhead costs were variable; $22,400 of X Company's fixed overhead costs can be avoided if it buys the part. If X Company buys the part, there are no alternative uses of the resources that were used for its production. Production next year is expected to increase to 53,300 units.

3. If X Company continues to make the part instead of buying it, it will save

4. X Company has an opportunity to negotiate the purchase price with the supplier. What purchase price would make X Company indifferent between making and buying?

Answer 1

3.

Per Unit Costs:

Materials = $ 250,000/50,000 units = $ 5 per Unit

Labour = $ 280,000/50,000 Units = $ 5.6 per Unit

Variable Overheads = $ 190,000/50,000 units = $ 3.8

Fixed Overheads = $ 270,000-$ 190,000 = $ 80,000

Costs of the Next Year:

Particulars	Units	Per Unit ($)	Amount ($)
Materials	53,300	5	2,66,500
Direct Labour	53,300	5.6	2,98,480
Variable Overheads	53,300	3.8	2,02,540
Fixed Overheads	53,300	-	80,000
Total Costs	-	-	8,47,520

Cost if the Company Purchases = 53,300 units * $ 16.06

= $ 8,55,998

Cost the Company can save if produces the Units than purchasing = $ 8,55,998 - $ 8,47,520

= $ 8,478

4.

If the Company wants to be indifferent between the making and buying then the Compnay should claim the company the following rate

= $ 8,47,520/53,300 units

= $ 15.90 per Unit