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		$2.79	$9,486
Direct labor		3.19	10,846
Variable overhead		3.30	11,220
Fixed overhead		5.20	17,680
Total		$14.48	$49,232

A company has offered to supply this part to X Company for $12.66 per unit. If X Company accepts the offer, it will avoid fixed costs of $9,724, and it will be able to lease the resources that will become available from not making the part for $2,000. At what production level would X Company be indifferent between making and buying the part next year?

Answer 1

	Per unit		Total 3400 units
	Make	Buy	Make	Buy
Direct materials	2.79		9486
Direct labor	3.19		10846
Variable overhead	3.30		11220
Avoidable fixed overhead			9724
Opportunity cost			2000
Outside Purchase cost		12.66		43044
Total cost	9.28	12.66	43276	43044
Difference in cost = 43276-43044= 232
Increase in production level = 232/(12.66-9.28)= 69
Indifferent production level = 3400+69 = 3469
3,469 is correct answer