X Company currently makes a part and is considering buying it from a company has
ID: 2573812 • Letter: X
Question
X Company currently makes a part and is considering buying it from a company has offered to supply it for $16.99 per unit. This year, per-unit production costs to produce 54,000 units were: Direct materials $5.70 Direct labor 5.40 Overhead 5.10 Total $16.20 $210,600 of the total overhead costs were variable; $22,680 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 $75,000. Production next year is expected to increase to 58,000 units.
3. If X Company continues to make the part instead of buying it, it will save 41956 Submit Answer Incorrect. Tries 1/5 Previous Tries
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? 858115 Submit Answer Incorrect. Tries 1/5
Explanation / Answer
3)
NOTES:
Variable Overhead per unit = $210600 /54000 units = $3.90 per unit
Total fixed cost = 54000 units x $5.10 per unit = $275400
Common fixed cost = $275400 - (210600+22680) = $42120
Common fixed cost is irrelevant for making the decisison as the fixed cost of $42120 will have to be incurred irrespective of buying or making the parts.
4)
Let Q be the number of parts at which the company will be indifferent about buying or making the parts
Total cost of making = (5.70+5.40+3.90) xQ + 22680 + 75000
Total cost of buying = $16.99Q
The company will be irrelevant about buying or making the parts when,
Total cost of making = total cost of buying
15Q + 97680 = 16.99 Q
1.99Q = 97680
Relevant cost of production of 58000 units Direct material (58000 units @ $5.70 per unit) $ 330,600 Direct labour (58000 units @ $5.40 per unit $ 313,200 Variable overhead (58000 units @ $3.90 per unit) $ 226,200 Avoidable Fixed Cost $ 22,680 Add: Rent forgone if the parts are produced $ 75,000 Total Relevant Cost of production (A) $ 967,680 Total cost of buying (58000 units @$16.99 per unit) (B) $ 985,420 Savings if the company makes the part instead of buying it (B- A) $ 17,740Related Questions
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