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 3,500 units were:

A company has offered to supply this part for $14.84 per unit. If X Company buys the part, $9,282 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. 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 $13,930 $3.98    Direct labor [all variable] 15,575 4.45    Variable overhead 14,000 4.00    Fixed overhead 17,850 5.10   

Explanation / Answer

X Company Make/ Buy Indifference Details Make   Buy Unit Material cost                3.98 Unit Direct Labor cost              4.45 Unit Variable OH              4.00 Unit External Purchase cost             14.84 Unit Variable cost           12.43             14.84 Total Fixed cost 17,850.00       8,568.00 Additional contribution margin from freed up resource    (2,200.00) Assume the indifferent production level=k k*12.43+17850=k.14.84+8568-2200 2.41k= 11482 k=4764 So the approximate indifference volume is       4,764.00 units

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