X Company is considering buying a part next year that they currently make. This
ID: 2452802 • Letter: X
Question
X Company is considering buying a part next year that they currently make. This year's per-unit production costs for 3,000 units were:
A company has offered to supply this part for $13.30 per unit. If X Company buys the part, $5,565 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 $2,200. Production next year is also expected to be 3,000 units.
2. If X Company buys the part instead of making it, it will save
3. At what production level would X Company be indifferent between making and buying the part?
4. X Company is considering buying a part next year that they currently produce. A company has offered to supply this part for $15.27 per unit. This year's total production costs for 55,000 units were:
Of the total overhead costs, $60,500 were fixed, and $46,585 of these fixed overhead costs are unavoidable. If X Company buys the part, the resources that were used for production can be rented out for $80,000. Production next year is expected to increase to 58,350 units. If X Company continues to make the part instead of buying it, it will save....?
Present Value Tables (If needed)
Present Value of $1.00
Present Value of an Annuity of $1.00
Materials $2.94 Direct labor [all variable] 4.51 Variable overhead 3.50 Fixed overhead 3.50 Total production costs $14.45Explanation / Answer
a. Current Cost details Units 3000 Details per unit Total Amt$ Materials 2.94 8,820 Direct Labor 4.51 13,530 Var. OH. 3.5 10,500 Fixed OH 3.5 10,500 Total prod cost 14.45 43,350 Offer for supply Units 3000 Details per unit Total Amt$ Purchase cost 13.3 39,900 Add :Unavoidable Fixed OH 4,935 Less :Additional Contribution (2,200) Net cost of offer 42,635 2 Saving from buying instaed of making $ 715.00 Suppose at production level x there is decision indifference Assuming fixed cost situation remains same cost of making = 10.95*x+10500 Cost of buy= 13.3*x+4935-2200 So, 10.95x+10500=13.3x+2735 2.35x=7765 x=3304 units 3 So at approx 3304 units , there will be indifference between make & buy 4 Production data Current Production Next years production Units 55,000.00 units 58,350 Details per unit Total Amt $ per unit Total Amt $ Materials 5.500 302,500 5.50 320,925 Direct Labor 4.400 242,000 4.40 256,740 Variable OH 3.400 187,000 3.40 198,390 Fixed OH 60,500 60,500 Total Making cost 792,000 836,555 Supply Offer Purchase cost 15.27 891,005 Add :Unavoidable Fixed OH 46,585 Less :Rental income (80,000) Net cost of offer 857,590 Saving from making instead of buying in nest year $ 21,035 As the rate of return is not available we cannot provide current worth of the saving next year.
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