Question

X Company is considering buying a part in 2020 that it has been making for the past several years. A company has offered to supply this part for $16.47 per unit. Budgeted production in 2020 is 53,000 units, and budgeted per-unit production costs are: $6.10 4.60 Materials Direct labor (all variable] Total overhead Total 5.70 $16.40 $90,100 of X Company's total overhead costs are fixed; $62,169 of the $90,100 are unavoidable even if it buys the part. Also, if X Company buys the part, it can rent the equipment that was used to make the part to another company for $80,000. 3. If X Company buys the part instead of making it, it will save Submit Answer Tries 0/3 4. At what production level would X company be indifferent between making and buying the part?

Answer 1

Scenario 1 - Let us first assume that the company does the production of the part on its own then:

Total production cost = Budgeted production units in 2020*budgeted per unit cost

= 53000 units * $ 16.40 = $ 8,69,200

Scenario 2 -If the company considers to source the product externally then the break up of the cost is as below:

Material - NIL (no expense incurred as we are going to source the product externally)

Direct Labour - NIL (as no production hence no labour)

Total overhead cost - 62169

Total cost after sourcing externally = Budgeted production units in 2020* cost per unit from external source+ unavoidable overhead cost

= 53000 units*$ 16.47 per unit + 62,169

=9,35,079

The existing equipment can be rented out at an additional income of $ 80,000

Hence total cost = 9,35,079-80,000 (income generated)=8,55,079

(A) Comparing scenario 1 and 2 above if Company X buys the product instead of making it it will save = 8,69,200-8,55,079=$14,121