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 3,500 units were: A company has offered to supply this part for $12.38 per unit. If X Company buys the part, $12,180 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 52,400. Production next year is also expected to be 3,500 units. If X Company buys the part instead of making it, it will save $6,180 3. At what production level would X Company be indifferent between making and buying the part?

Explanation / Answer

Let quantity be x
Two cost functions equal to each other
($3.02 + $3.66 + $3.30 )x + 3500 units x $6 = $12.38 x + (3500 x 6 - $12,180)
$9.98 x + $21000 = $12.38x + $8820
$2.40 x = $12,180
x = 5075 units

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