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 Tota P Unit Materials Direct labor Total overhead $519,495 $5.87 S418,605 $4.73 $167,280 $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 There is no alternative use for the resources currently involved in the production of the part 3. If X C 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 ompany continues to make the part instead of buying

Explanation / Answer

If X company continues to make the part instead of buying it will save -46750.

Calculation of the same is as below -

Existing cost per unit for 88500 units

now for 93500 units cost will be -

Buying rate = 15.30

saving in cost = (15.30 -15.80)*93500

= 0.50*93500

= - 46750 means he does nt save the cost in manufacturing it.

4. Total variable cost = 14.43

fixed cost = 128325

indifference point between buying and producing = fixed cost / (buying cost per unit - variable cost per unit)

= 128325 / (15.30 - 14.43)

= 147500 units

In case of further clarification required please comment.

Costs: Amt. $ per unit category Direct Material 519495 5.87 variable Direct labor 418605 4.73 variable Total overhead cost Fixed overhead 128325 1.45 fixed variable overhead 338955 3.83 variable Total Cost 1405380 15.88

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