Question

# X Company is considering buying a part next year that they currently make. This year's production...

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 \$3.99 \$11,970 Direct labor 3.08 9,240 Variable overhead 2.60 7,800 Fixed overhead 4.20 12,600 Total \$13.87 \$41,610

A company has offered to supply this part to X Company for \$12.92 per unit. If X Company accepts the offer, it will still incur fixed costs of \$6,678, but it will be able to lease the resources that will become available from not making the part for \$2,200. At what production level would X Company be indifferent between making and buying the part next year?

 Per unit Total 3000 units Make Buy Make Buy Direct materials 3.99 11970 Direct labor 3.08 9240 Variable overhead 2.60 7800 Avoidable fixed overhead 5922 Opportunity cost 2200 Outside Purchase cost 12.92 38760 Total cost 9.67 12.92 37132 38760 Difference in cost = 38760-37132 = 1628 Decrease in production level = 1628/(12.92-9.67)= 501 Indifferent production level = 3000-501= 2499 2499 is correct answer

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