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

Question

Questions 12 and 13 refer to the following information: X Company is considering buying a part next year that they currently make. This year's production costs for 3,000 units were: Per-Unit Direct materials Direct labor Variable overhead Pixed overhead Total Total $9,840 11,130 7,800 15,300 $3.28 3.71 2.60 5.10 $14.69 $44,070 A company has offered to supply this part for $12.09 per unit. If X Company buys the part, $7,956 of the fixed overhead can be avoided. Also if X Company buys the part, it can use the freed-up resources to increase production of another product, resulting in additional contribution margin of $3,000. Production next year is expected to be 3,300 units 8 pt 12. If X Company buys the part instead of making tt l save 12. A? $650 BO $865 CC) $1,150 DO $1,530 EO $2,035 FO $2,706 8 pt 13. X Company is uncertain what production will be next year. What production level would make X Company indifferent between making and buying the part? 13. AO 3,432 BO 3,878 CO 4,382 DO 4,952 EO 5,596 FO 6,323

Explanation / Answer

Question 12:

Let us find out the cost of company if it buys the part instead of making it:

Production = 3300 units

Cost of parts bought from outside = 3300 x 12.09 = 39,897

Fixed cost = 15300 - 7956 = 7344

Savings from producing another product = 3000

Total Cost = 39897 + 7344 - 3000 = $44,241

Cost of 3300 units if it makes the part instead of buying:

Direct material = 3300 x 3.28 = 10824

Direct labour = 3300 x 3.71 = 12243

Variable overheads = 3300 x 2.60 = 8580

Fixed cost = 15300

Total cost = 10824 + 12243 + 8580 + 15300 = $46,947

Therefore savings in cost = $46947 - $44241 = $2706

Answer is Option F ($2,706)

Question 13:

Analysis of fixed and variable cost in both the cases:

Buying the part:

Variable cost = 12.09

Fixed cost = 7344

Savings in cost = 3000

Net fixed cost = 4344

Making the part:

Variable cost = 3.28 + 3.71 + 2.60 = 9.59

Fixed cost = 15300

Indifference point formula = Difference in fixed cost / Difference in variable cost per unit

=(15300 - 4344) / (12.09 - 9.59)

= 10956 / 2.5

= 4,382 units

So at production level of 4,382 units X company would be indifferent between making and buying the part.

Answer is Option C (4,382 units).

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