Question

X Company is considering buying a part next year that it currently makes. This year's production costs for 3,100 units were:

Per-Unit Total

Direct materials $2.80 $8,680  

Direct labor 4.18 12,958  

Variable overhead 3.80 11,780  

Fixed overhead 5.10 15,810  

Total $15.88 $49,228

A company has offered to supply this part for $14.70 per unit. $7,431 of X Company's fixed overhead are allocated costs that will occur even if they buy the part. But if X Company buys the part, it can rent out the freed-up resources for $3,000. Production next year is expected to be 3,500 units.

Part 1. If X Company continues to make the part instead of buying it, it will save?

Part 2 At what production level would X Company be indifferent between making and buying the part?

Answer 1

1
	Per unit		Total 3500 units
	Make	Buy	Make	Buy
Direct materials	2.8		9800
Direct labor	4.18		14630
Variable overhead	3.80		13300
Avoidable fixed overhead			8379
Opportunity cost			3000
Outside Purchase cost		14.7		51450
Total cost	10.78	14.7	49109	51450
Savings in cost = 51450-49109 = $2341
2
Decrease in production level = 2341/(14.7-10.78)= 597
Indifferent production level = 3500-597= 2903
Note: There is no information provided regarding rounding off For question 2.
The answer has been rounded to nearest whole number.
Avoidable fixed overhead = 15810-7431 = $8379