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 3,300 units were: Materials $3.95 Direct labor [all variable] 4.82 Variable overhead 4.50 Fixed overhead 3.00 Total production costs $16.27 A company has offered to supply this part for $15.75 per unit. If X Company buys the part, $5,346 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 $2,800. Production next year is also expected to be 3,300 units. At what production level would company be indifferent between making and buying the part?

Explanation / Answer

Calculate indifferenct production level :

Manufacturing cost = Purchase cost

13.27X+5346+2800 = 15.75X

-2.48X   = -8146

X(indifferent production level) = 3285 units

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