Question

X Company is considering buying a part next year that they currently make. This year's production costs for 3,400 units were as follows:

		Per-Unit	Total
Direct materials		$2.40	$8,160
Direct labor		3.54	12,036
Variable overhead		3.50	11,900
Fixed overhead		4.00	13,600
Total		$13.44	$45,696

A company has offered to supply this part to X Company for $12.89 per unit. If X Company accepts the offer, it will still incur fixed costs of $6,256, but it will be able to lease the resources that will become available from not making the part for $2,800. At what production level would X Company be indifferent between making and buying the part next year?

Answer 1

2,940	Units
Let X be the units at indifferent level
Making
$9.44X + $13,600
Buying
$12.89X + $6,256 -$2,800
Now
$9.44X + $13,600 =	$12.89X + $6,256 -$2,800
$12.89X - $9.44X =	$13,600 - $3,456
3.45X=	10,144
X =	2,940