Question

X Company is considering buying a part next year that they currently make. This year's production costs for 3,000 units were as follows:

		Per-Unit	Total
Direct materials		$2.61	$7,830
Direct labor		4.80	14,400
Variable overhead		2.70	8,100
Fixed overhead		5.10	15,300
Total		$15.21	$45,630

A company has offered to supply this part to X Company for $12.55 per unit. If X Company accepts the offer, it will still incur fixed costs of $7,191, but it will be able to lease the resources that will become available from not making the part for $2,900. Next year's expected production level is 3,500 units.

11. If X Company buys the part next year instead of making it, it will save

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			9135	0	9135
Labour			16800	0	16800
Variable overheads		9450	0	9450
Fixed overheads		15300	7191	8109
Opportunity cost-lease rental	2900	0	2900
Cost of purchase		0	43925	-43925
Total cost			53585	51116	2469
If company buys the part next year instead of making, it will save $2469.
Fixed cost of making (avoidable)		8109
Add: Opportunity cost			2900
Total fixed cost				11009
Divide: Difference in Variable cost per unit		2.44
Variable cost of making (2.61+4.80+2.70)	10.11
Variable cost of buying		12.55
Indifference production level			4512	units