X Company is considering buying a part next year that they currently make. This
ID: 2463391 • Letter: X
Question
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 $12.57 per unit. If X Company buys the part, $6,361 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 $2,500. X Company is uncertain what production will be next year. At what production level would it be indifferent between making and buying the part?
Materials Direct labor [all variable] Variable overhead Fixed overhead Total $7,409 12,524 11,470 11,780 Per-Unit $2.39 4.04 3.70 3.80Explanation / Answer
The Indifferent between making and buying the part =
(2.39 + 4.04 + 3.70) * X + 11,780 = 12.57 * X + 2919
Where, X equal to indifferent point in units.
= 10.13 * X + 11780 = 12.57 * X + 2919
= 12.57 * X - 10.13 * X = 11780 - 2919
= 2.44 * X = 8861
= X = 8861 / 2.44 = 3631.557 units
that is 3631 or 3632 units is Indifferent point in units between making and buying the part.
Cross verifcaiton: Number of Units = 3631.557
Making cost = Materials+Direct Labour +varaible overhead + fixed overhead
= 10.13 * 3631.557 + 11780 = $ 48,567.676
Buying Costg = 12.57 * 3631.557 + 5419 - 2500 = $ 48,567.676
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