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 3,200 units were:

A company has offered to supply this part for $11.62 per unit. If X Company buys the part, $7,987 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 $3,000. X Company is uncertain what production will be next year. At what production level would it be indifferent between making and buying the part?

Total   Per-Unit Materials $11,040 $3.45    Direct labor [all variable] 10,080 3.15    Variable overhead 8,640 2.70    Fixed overhead 15,360 4.80   

Explanation / Answer

Total   Per-Unit Materials $11,040 $3.45 Direct labor [all variable] 10,080 3.15 Variable overhead 8,640 2.7 total variable $9.30 Fixed overhead 15,360 4.8 $23.40 Buying cost 11.62 v.cost $9.30 contribution per unit $2.32 saving in FC      7,987 add contribution margin      3,000    10,987 production level to be indifferent      4,736 (10987/2.32)

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