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 per-unit production costs for 3,400 units were: Materials $3.36 Direct labor [all variable] 3.42 Variable overhead 4.10 Fixed overhead 5.90 Total production costs $16.78 A company has offered to supply this part for $13.31 per unit. If X Company buys the part, $10,431 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. Production next year is also expected to be 3,400 units.

At what production level would X Company be indifferent between making and buying the part?

Explanation / Answer

If we buy it from outside then Fixed cost would be saved and additional contribution would be generated.

Therefore forming an equation,

Units * Variable cost of making = Units * Cost of buying - saving in fixed cost - Contribution margin

Units *(3.36+3.42+4.1) = units * 13.31 - 10431 -2500

12931 = 2.43* units

Indifferent Units = 5321.4

At above leverl of output the cost will be same under both the option either byu or make.

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