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 $13.13 per unit. If X Company buys the part, $6,708 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 $2,000. X Company is uncertain what production will be next year. At what production level would it be indifferent between making and buying the part?

Explanation / Answer

Buy cost=13.13 per unit*3,000 units=$39,390

Add - Unavoidable Fixed Cost=(12,900-6,708)=$6192

Less -Additional contribution Margin=2,000

$43,582

Make Cost=

Variable Cost =3,000 units*10.65(2.79+3.56+4.30)=31,950

Fixed Overhead=12,900

Total=44,850

Indifferent point-

Variable Cost*units+Fixed cost=Buying Cost*units+

Unavoidable Fixed Cost-Additional Contribution Margin

10.65*X+12,900=13.13*X+Unavoidable Fixed Cost-Additional Contribution Margin

10.65X+12,900=13.13X+6,192-2,000

13.13X-10.65X=12,900-6192+2000

2.48X=8708

X=8708/2.48=3,511 units

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