Question

X Company is considering buying a part next year that it currently makes. A company has offered to supply this part for $17.69 per unit. This year's total production costs for 54,000 units were:

Materials	$318,600
Direct labor	302,400
Total overhead	324,000

$243,000 of X Company's total overhead costs were variable; $30,780 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 58,700 units.

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

Tries 0/3

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)

Calcualtion of total cost 58700 units if it is made by company itself:

Materials = (318600/54000) *58700 = 5.90*58700 = 346330

Add: Direct labor = (302400/54000)*58700 = 5.6*58700 = 328720

Add: Total overhead = 324000

Total production cost = 346330+328720+324000 = 999050

Calculation of total cost 58700 units if company buys the part from another company:

Total cost to be paid = 17.69*58700 = 1038403

Unavoidable fixed costs = 324000 - 243000 - 30780 = 50220

Total cost of buying = 1038403 + 50220 = 1088623

Savings to company = 1088623 - 999050 = 89573

If X Company continues to make the part instead of buying it, it will save $89573.

4)

Number of units to be supplied = 58700

Total cost of buying that the company is able to pay to outsider = 999050 - 50220 = 948830

Purchase price per unit = 948830/58700 = 16.16

Company X should pay $16.16 to be indifferent between making and buying.