Question

X Company is considering buying a part next year that it currently makes. A company has offered to supply this part for $17.44 per unit. This year's total production costs for 56,000 units were:

Materials	$364,000
Direct labor	274,400
Total overhead	336,000

$252,000 of X Company's total overhead costs were variable; $30,240 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 60,450 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

Note :

Total fixed overheads = $336,000 - $252,000 = $84,000

Total variable cost per unit = (DM + DL + Var.o/h ) / units =  [ ($364,000 + $274,400 + $252,000) / 56,000 units ] = $15.90

Answer 3 :

Cost of making 60,450 units :

= ($15.90 * 60,450 units) + $84,000 = $1,045,155

Cost of buying 60,450 units :

= ($17.44  * 60,450 units) + ($84,000 - $30,240) = $1,054,248 + $53,760 = $1,108,008

Saving in cost if X Company continues to make the part instead of buying it

= $1,108,008 - $1,045,155 = $62,853

Answer 4 :

Let the purchase price be $ Z

At indifferent point we can form the following equation :

($15.90 * 60,450 units) + $84,000 = ($Z  * 60,450 units) + ($84,000 - $30,240)

or, 1,045,155 = 60,450 Z + 53,760

Z = 16.40

Required purchase price that would make X Company indifferent between making and buying = $16.40 (approx)