Question

X Company is considering buying a part next year that it currently makes. This year's production costs for 3,200 units were:

		Per-Unit	Total
Direct materials		$2.68	$8,576
Direct labor		4.32	13,824
Variable overhead		4.00	12,800
Fixed overhead		4.80	15,360
Total		$15.80	$50,560

A company has offered to supply this part for $14.99 per unit. $7,526 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 $2,700. Production next year is expected to be 3,500 units.

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

Tries 0/3

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

Tries 0/3

Answer 1

1
	Per unit		Total 3500 units
	Make	Buy	Make	Buy
Direct materials	2.68		9380
Direct labor	4.32		15120
Variable overhead	4.00		14000
Avoidable fixed overehead			7834
Opportunity cost			2700
Outside Purchase cost		14.99		52465
Total cost	11	14.99	49034	52465
Savings in cost = 52465-49034 = $3431
2
Decrease in production level =3431/(14.99-11)= 860
Indifferent production level = 3500-860= 2640
Note: There is no information provided regarding rounding off For question 2.
The answer has been rounded to higher decimal place.
Avoidable fixed overehead=15360-7526 = $7834