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 $16.37 per unit. This year, per-unit production costs to produce 54,000 units were:

$178,200 of the total overhead costs were variable; $16,848 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 59,000 units.

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 $7.00 Direct labor 4.30 Overhead    4.50 Total    $15.80

Explanation / Answer

Variable Overhead Cost per unit = 178200 / 54000 = 3.30 per unit

Fixed Overhead Per Unit = 4.5 - 3.3 = 1.2 Per Unit

Total Fixed Cost = 54000 x 1.2 = 64800

Let at Q both options will be indifferent

Profit under manufacturing = Profit under renting

(16.37 - 14.60) x Q - 64800 = 75000 - (64800-16848)

1.77Q - 64800 = 75000-47952

1.77Q = 91848

Q = 51892 Units

At 51892 Units both options would be indifferent

Particulars Amt Direct Material           7.00 Direct Labor           4.30 Variable Overhead           3.30 Cost per unit         14.60

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