Question1 X Company is considering a modification to one of its main products th

Question

Question1

X Company is considering a modification to one of its main products that would make it more attractive to customers. A market research study costing $5,600 was conducted, and it indicated that the company could increase the price of the product by $2.22 with no decrease in unit sales; the current price is $9.90. Variable costs for the product are $4.04 and will not change as a result of the modification, but additional equipment would have to be rented, increasing fixed costs from $10,140 to $14,270. At what unit sales level would X Company be indifferent between modifying the product and not modifying it?

Question 2

X Company is considering buying a part next year that they currently make. This year's production costs for 3,100 units were:

A company has offered to supply this part for $13.37 per unit. If X Company buys the part, $8,866 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 $2,800. X Company is uncertain what production will be next year. At what production level would it be indifferent between making and buying the part?

Q3

X Company is considering buying a part next year that they currently produce. A company has offered to supply this part for $15.54 per unit. This year's per-unit production costs for 57,000 units were:

Of the total overhead costs, $74,100 were fixed, and $48,165 of these fixed overhead costs are unavoidable. If X Company buys the part, the resources that were used for production can be rented to another company for $70,000. Production next year is expected to increase to 60,650 units. If X Company continues to make the part instead of buying it, it will save _________?

Total   Per-Unit Materials $11,160 $3.60    Direct labor [all variable] 11,687 3.77    Variable overhead 11,160 3.60    Fixed overhead 17,050 5.50   

Explanation / Answer

1. solution:

The point of indifference where the Company X modifying the product and not modifying it.

point of indifference = change in fixed cost / change in contribution margin

change in fixed cost = 14,270 - 10,140 = 4,130

change in contribution margin =  $2.22 ( 8.08 - 5.86)

Note: figure 8.08 = 12.12 sales - 4.04variable cost, here sales = 9.9 + 2.22

figure 5.86 = 9.9 sales - 4.04variable cost

point of indifference = change in fixed cost / change in contribution margin

= 4,130 / 2.22 = 1,860 units is the point of indeference

If the expected units are more than 1,860 then modify the product and if sales are less than 1,860 then not to modify it.

2. Solution: Here, the formula for point of indifference is

point of indifference = change in fixed cost / change in Variable cost

change in fixed cost = 8,866 already given as avoidable i.e, change in fixed cost + opportunity cost that is contribution forgone

= 8,866 + 2,800 = 11,666

change in varaible cost =  $2.4 ( that is 13.37 - 10.97 )

the figure $13.37 already given by buying it and 10.97 need to be computed that is
Total variable cost = (3.6 + 3.77 + 3.6) = 10.97

change in Variable cost = 13.37 - 10.97 = 2.4

point of indifference = change in fixed cost / change in Variable cost

= 11,666 / 2.4 = 4,861 units is the indifferent between making and buying the part

If the units are expected less than 4,861 then he will buy and If more than 4,861 he will produce himself.

3. Solution: If X Company continues to make the part instead of buying it, it will save _________?

Saving's in cost = 920,666 - 905,005 = $15,661

Note-1: Variable overhead cost:

Total overhead cost = 4.6per unit for 57,000 units

= 4.6 * 57,000 = 262,200

From this 262,200 it was given that 74,100 are fixed = that means 262,200 - 74,100 = 188,100 is variable portion

variable overhead cost per unit = 188,100 / 57,000units = $3.3 per unit

Details If buys If Produced Material cost (15.54 * 60,650) = 942,501 (6.10 * 60,650) = 369,965 Direct labor [all variable] - (4.3 * 60,650) = 260,795 Variable overhead cost -note1 - (3.3 * 60,650) = 200,145 Fixed cost 48,165 ( unavoidable) 74,100 Total cost 990,666 905,005 Less: rental income -70,000 0 Net cost 920,666 905,005

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.