X Company is considering buying a part next year that they currently make. A com
ID: 2357180 • Letter: X
Question
X Company is considering buying a part next year that they currently make. A company has offered to supply this part for $14.71 per unit. X Company would have to inspect each part at a cost of $0.23 per unit. This year's production costs for 11,600 units of this part were: Cost Item Total Per-Unit Materials $45,588 $3.93 Direct labor 55,332 4.77 Variable overhead 49,416 4.26 Fixed overhead 39,440 3.40 Total $189,776 $16.36 If X Company buys the part, $21,298 of the fixed overhead is common and unavoidable; the rest can be avoided. In addition, if X Company buys the part, it can rent out the facilities that it currently uses to make the part and receive $14,320 per year. Estimated production next year is expected to be the same as last year. 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
MAKE - 10.48 VC + 42,780 FC = 15.13 each at 9,200 BUY - 12.84 VC + 17,812 (24,812 - 7,000) = 135,940 / 9,200 = 14.78 each at 9,200 1. Saves .35 x 9,200 = 3,220 2. Let Q = Quantity when indifferent (10.48 x Q) + 42,780 = (12.84 x Q) + 17,812 42,780 - 17,812 =12.84Q - 10.48Q 24,968 = 2.36Q Q = 24,968 / 2.36, or 10,580 PROOF: MAKE 10,580 x 10.48 = 110,878 + 42,780 = 153,658 BUY 10,580 x 12.84 = 135,847 + 17,812 = 153,659
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