Question

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

		Per-Unit	Total
Direct materials		$3.96	$12,276
Direct labor		3.18	9,858
Variable overhead		4.20	13,020
Fixed overhead		3.90	12,090
Total		$15.24	$47,244

A company has offered to supply this part to X Company for $13.84 per unit. If X Company accepts the offer, it will avoid fixed costs of $5,440, and it will be able to lease the resources that will become available from not making the part for $2,700. Next year's expected production level is 3,500 units.

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

Answer 1

Differential analysis
			Make	Buy	Effect on Income
Material cost		13860	0	13860
Labour cost		11130	0	11130
Variable overhead		14700	0	14700
Fixed overheads		12090	6650	5440
Opportunity cost-Lease rent	2700	0	2700
Cost of purchase		0	48440	-48440
Total			54480	55090	-610
Net financial disadvantage of buying is ($610)
Indifference producton level
Avoidable fixed cost		5440
Opportunity cost		2700
Total fixed cost			8140
Divide: Difference in Variable cst per unit
VC of buying		13.84
VC of making		11.34	2.5
(3.96+3.18+4.20)
Indifference producton level		3256
Answer is 3256 units