X Company currently makes a part and is considering buying it from a company has

Question

X Company currently makes a part and is considering buying it from a company has offered to supply it for $13.86 per unit. This year, per-unit production costs to produce 56,000 units were:

$151,200 of the total overhead costs were variable; $32,256 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 $70,000. Production next year is expected to increase to 60,100 units.

3. If X Company continues to make the part instead of buying it, it will save ?

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?

Direct materials $5.40 Direct labor 4.00 Overhead    4.30 Total    $13.70

Explanation / Answer

3 If X Company continues to make the part instead of buying it, it will save $ 3520 whose details we are belowmentioning:

At 58100 no of units production level will the company be indifferent between making and buying the part whose details we are belowmentioning:

STATEMENT SHOWING THE COST OF PRODUCTION OF 60100 STATEMENT SHOWING THE COST OF PURCHASE OF 60100 Description No oF Units Cost per unit Total Description No of units Purchase Cost Per unit Direct Material 60100 $5.40 $3,24,540.00 Purchase Cost 60100 $13.86 $8,32,986.00 Direct Labour 60100 $4.00 $2,40,400.00 Add: Unavoidable Fixed Cost $57,344.00 Overhead-Variable 60100 $2.70 $1,62,270.00 Less: Rental Income -$70,000.00 Overhead-Fixed $32,256.00 Unavoidable Fixed Cost $57,344.00 $8,16,810.00 $8,20,330.00 Total Cost Per Unit $13.59 $13.65 A COST OF PRODUCTION $8,16,810.00 B COST OF PURCHASE $8,20,330.00 If Company Continues to manufacture it will save (B-A) $3,520.00

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