Questions 12 and 13 refer to the following problem: X Company is considering buy

Question

Questions 12 and 13 refer to the following problem:
X Company is considering buying a part next year that they currently make. A company has offered to supply this part for $11.80 per unit. X Company would have to inspect each part at a cost of $0.30 per unit. This year's production costs for 10,350 units of this part were:
Cost Item Total Per-Unit
Materials $27,220 $2.63
Direct labor $37,674 $3.64
Variable overhead $45,436 $4.39
Fixed overhead $45,436 $4.39

If X Company buys the part, $19,992 of the fixed overhead can be avoided; the rest is unavoidable. In addition, if X Company buys the part, it can rent out the facilities that it currently uses to make the part and receive $11,700 per year. Estimated production next year is also expected to be 10,350 units.

If X Company buys the part, it will save?


X Company is concerned that next year's demand may be different than this year's demand. At what level of demand will X Company be indifferent between making and buying?

Explanation / Answer

If X Company buys the part, it will save?

Cost to make 10,350 units: 27,220 + 37,674 + 45,436 + 45,436 + 11,700 (opportunity cost = 167,466

Cost to buy 10350 units: 11.80*10,350 + 0.30*10,350 + 25,444 (fixed cost less avoidable) = 150,679

Difference: 167466 – 150679 = 16,787

Answer: They will save $16,787 by buying the part

X Company is concerned that next year's demand may be different than this year's demand. At what level of demand will X Company be indifferent between making and buying?

When cost to make = cost to buy; x = number of units
(2.63+3.64+4.39)*X + 45,436 + 11,700 = (11.80 + 0.30)*X + 25,444
10.66X + 57,136 = 12.1X + 25,444
31,692 = 1.44X
X = 22008
Answr: 22,008 units

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.