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 3,200 units were: A company has offered to supply this part for $15.33 per unit. If X Company buys the part, $8,422 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 3,200 units. If X Company buys the part instead of making it, it will save $3,270 At what production level would X Company be indifferent between making and buying the part?

Explanation / Answer

Number 3 :

X company would be indifferent between making and buying the product when the total costs for making and buying will be equal at the volume where:

(Variable Cost per unit * No. of Units ) + Avaoidable Fixed Cost = Cost of Buy

Let Number of Units be U

{(Direct Material + Direct Labor + Variable Overhead) *U} + 8,422 = 15.33*U

or $ 12.97 U + $ 8,422 = $ 15.33 U

or U = 8,422/2.36

        = 3,569 Units

The production level at which X Company would be indifferent between making and buying the product is 3,569 Units .

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