X Company s considering buying a part next year that they currently make. This y

Question

X Company s considering buying a part next year that they currently make. This year's total production costs for 10,500 units of this part were:

A company has offered to supply this part for $13.60 per unit. If X Company buys the part, $6,720 of the fixed overhead can be avoided, but there is no alternative use of the freed-up resources. Production next year is expected to be the same as this year.

a. The costs of making the part are less than the costs of buying the part by

b. X Company is uncertain what next year's required production will be. At what production level will X Company be indifferent between making and buying the part?

Explanation / Answer

a) =10500*13.6 +(33600-6720) - (39060+43995+36750+33600)

= $16275

and for per unit = 16275/10500 = $1.55 less than the cost of buying the part.

b) let next year production level be x so that there will not be indifferent between making and buying

13.6x + 26880 = (93/25)x + (419/100))x + (7/2)x + (33600)

x = 3068.49

or, x ~ 3068

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