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		$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?

Answer 1

	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