Questions 3 and 4 refer to the following information: X Company currently makes
ID: 2573738 • Letter: Q
Question
Questions 3 and 4 refer to the following information: X Company currently makes a part and is considering buying it from a company has offered to supply it for $16.55 per unit. This year, per-unit production costs to produce 55,000 units were: Direct materials Direct labor Overhead Total $6.30 4.20 6.10 $16.60 $236,500 of the total overhead costs were variable; 31,680 of the fixed overhead costs can be avoided if X Company buys the part. In addition, the resources that were used for production can be rented to another company for $80,000. Production next year is expected to increase to 59,100 units 3. If X Company buys the part instead of making it, it will save Submit Answer Tries 0/5 4. X Company is uncertain about next year's production level. At what production level will the company be indifferent between making and buying the part? Submit Answer Tries 0/5Explanation / Answer
Req 3: Total Overheads (55000 units@6.10) 335500 Less: Variable overheads 236500 (i.e. 236500/55000 = $4.30 per unit) Fixed Overheads 99000 Net cost of buying the product: Cost of Buying the product (59100 units@16.55) 978105 less: Rented income of production capacity 80000 Net cost of buying the product 898105 Relevant cost of manufacture: Direct material (59100 units@ 6.30) 372330 Direct labour (59100 units@4.20) 248220 Variable overheads(59100units@4.30) 254130 Avoidable fixed cost 31680 Relevant cost of manufacture 906360 Therefore, Saving in cost 8255 Req 4: Let production level be X units Cost of bbuying the X units = 16.55*X - 80,000(rental income) Cost of manufacture X units = 14.80*X+31680 At indifference point, both the cost shold be same: 16.55X -80,000 = 14.80X +31680 Therefore, X i.e. production units at indifference point = 63,817 units
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