Question

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

		Per-Unit	Total
Direct materials		$3.11	$10,885
Direct labor		3.34	11,690
Variable overhead		2.60	9,100
Fixed overhead		3.90	13,650
Total		$12.95	$45,325

A company has offered to supply this part to X Company for $12.22 per unit. If X Company accepts the offer, it will still incur fixed costs of $7,508, but it will be able to lease the resources that will become available from not making the part for $2,100. At what production level would X Company be indifferent between making and buying the part next year?

Answer 1

	Per unit		Total 3500 units
	Make	Buy	Make	Buy
Direct materials	3.11		10885
Direct labor	3.34		11690
Variable overhead	2.60		9100
Avoidable fixed overhead			6142
Opportunity cost			2100
Outside Purchase cost		12.22		42770
Total cost	9.05	12.22	39917	42770
Difference in cost = 39917-42770= $2853
Decrease in production level = 2853/(12.22-9.05)= 900
Indifferent production level = 3500-900 = 2600
2,600 is correct answer