Question

X Company is considering buying a part next year that it currently makes. This year's production costs for 3,500 units were:

		Per-Unit	Total
Direct materials		$2.84	$9,940
Direct labor		4.46	15,610
Variable overhead		2.90	10,150
Fixed overhead		3.40	11,900
Total		$13.60	$47,600

A company has offered to supply this part for $14.07 per unit. $5,831 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 $2,300. Production next year is expected to be 3,900 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 3900 units
	Make	Buy	Make	Buy
Direct materials	2.84		11076
Direct labor	4.46		17394
Variable overhead	2.90		11310
Avoidable fixed overehead			6069
Opportunity cost			2300
Outside Purchase cost		14.07		54873
Total cost	10.2	14.07	48149	54873
Savings in cost = 54873-48149 = $6724
2
Decrease in production level = 6724/(14.07-10.20)= 1737
Indifferent production level = 3900-1737= 2163
Note: There is no information provided regarding rounding off For question 2.
The answer has been rounded to nearest whole number. Exact answer would be 2162.53
Avoidable fixed overehead=11900-5831 = $6069