X Company is considering buying a part next year that they currently make. This

Question

X Company is considering buying a part next year that they currently make. This year's per-unit production costs for 3,000 units were:

A company has offered to supply this part for $12.05 per unit. If X Company buys the part, $6,435 of the fixed overhead can be avoided. Also if X Company buys the part, it can use the freed-up resources to increase production of another product, resulting in additional contribution margin of $2,300. Production next year is also expected to be 3,000 units.
1. If X Company buys the part instead of making it, it will save_____

2. At what production level would X Company be indifferent between making and buying the part?____

Materials $2.39 Direct labor [all variable] 4.62 Variable overhead 2.70 Fixed overhead     3.90 Total production costs $13.61

Explanation / Answer

Answer:1

Make cost=3000 units($9.71)+(3000*3.90)=$40830

Buy=3000($12.05)+(3000*3.90-6435)-2300=39115

Saving in cost=40830-39115=1715

Answer:2 Make cost=Buy cost

$13.61x=12.05x+2965

x=1901 units

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