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 production costs for 3,000 units were:

A company has offered to supply this part for $13.57 per unit. If X Company buys the part, $8,424 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 $2,100. X Company is uncertain what production will be next year. At what production level would it be indifferent between making and buying the part?

Total   Per-Unit Materials $11,880 $3.96    Direct labor [all variable] 9,780 3.26    Variable overhead 12,000 4.00    Fixed overhead 15,600 5.20   

Explanation / Answer

Let at "X" be the indifferent point

Incremental cost if bought = 13.57 *X

Incremental savings = X(3.96 + 3.26 +4 ) + 8424 +2100

                             = 11.22X + 10524

At indifference point COst =savings

         11.22X + 10524 = 13.57X

         13.57X -11.22X = 10524

            2.35X = 10524

          X = 10524 /2.35 = 4478 units approx

So at production level of 4478 units they will be indifferent between buying and selling

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