X Company is considering buying a part next year that they currently produce. A

Question

X Company is considering buying a part next year that they currently produce. A company has offered to supply this part for S15.30 per unit. This ycar's total production costs for 88,500 units of this part were: Cost Item Total Per Unit Materials Direct labor Total overhead 8519,495 $5.87 8418,605 84.73 $467,280 $5.28 Of the total overhead costs, 28,325 were fixed, and of the total fixed overhead costs, $87,261 were allocated to this part Production next year is expected to incroase to 93,350 units Thereis no alternative use for the resources currently involved in the production of the part 3. If X Company continues to make the part instead of buying it, it will save Tries 0/3 4. X Company is uncertain about the demand in coming years. At what level of demand will X Company be indifferent between making and buying? Tries 0/3

Explanation / Answer

COST ANALYSIS BASED ON 93,350 units production/purchase Cost per unit Make Buy Incremental cost of buying A Materials $5.87 $0 ($5.87) B Direct labor $4.73 $0 ($4.73) C Variable overhead(467280-128325)/88500 $                    3.83 $0 ($3.83) D Fixed overhead(128325/93350) $                    1.37 $1.37 $0 E Purchase price $0 $15.30 $15.30 F=A+B+C+D+E Total cost per unit $15.80 $16.67 $0.87 G=F*93350 Total Cost for 93350 units $1,475,365.50 $1,556,144.50 $81,214.50 3 If X company continues to make the part instead of buying, it will save $81,214.50 4 Indifferent between making and buying: Materials $5.87 $0 Direct labor $4.73 $0 Variable overhead(467280-128325)/88500 $                    3.83 $0 Purchase price $0 $15.30 Total $14.43 $15.30 Variable cost of production is $14.43 Purchase price =$15.30 which is higher than the variable cost If there is no other alternative use of current resources, the fixed cost will be incurred whether the comapany makes it or buys the part. Hence for any level of production, Making will be cheaper than buying

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