X Company is considering buying a part next year that they currently make. This
ID: 2510941 • Letter: X
Question
X Company is considering buying a part next year that they currently make. This year's per-unit production costs for 3,500 units were:
A company has offered to supply this part for $14.12 per unit. If X Company buys the part, $10,588 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 $2,900. Production next year is also expected to be 3,500 units.
2. If X Company buys the part instead of making it, it will save
3. At what production level would X Company be indifferent between making and buying the part?
Materials $3.09 Direct labor [all variable] 4.52 Variable overhead 4.20 Fixed overhead 5.50 Total production costs $17.31Explanation / Answer
2 Make Buy Materials 10815 Direct labor 15820 Variable overhead 14700 Fixed overhead avoidable 10588 Additional contribution margin 2900 Purchase cost 49420 Total 54823 49420 X company will save $5403 3 Indifferent unit level=3500+(5403/(14.12-3.09-4.52-4.2))= 5839
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