X Company is considering buying a part next year that they currently make. This

Question

X Company is considering buying a part next year that they currently make. This year's per-unit production costs for 3,300 units were:

A company has offered to supply this part for $11.90 per unit. If X Company buys the part, $10,514 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 $2,400. Production next year is also expected to be 3,300 units.

1. If X Company buys the part instead of making it, it will save

2. At what production level would X Company be indifferent between making and buying the part?

Materials $2.37 Direct labor [all variable] 4.64 Variable overhead 2.50 Fixed overhead     5.40 Total production costs $14.91

Explanation / Answer

Total Cost (If made)=$14.91*3200=$47,712

Total cost (if buy)=$11.90*3200+($5.4*3200-$10,514)

=$38,080+$6,766=$44,846

If you buy part instead of making , we can save up to $2,866($47,712-$44,846)

2) Assume no of units to be buy

so 14.91x=11.90x+6766

14.91x-11.90x=6766

x=6766/2.21

=3061.538=3062

Indifferent poin=3062 items

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