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 $17.02 per unit. Budgeted production in 2020 is 51,000 units, and budgeted per-unit production costs are: Materials Direct labor (all variable] Total overhead Total $6.30 4.70 5.60 $16.60 $71,400 of X Company's total overhead costs are fixed; $44,268 of the $71,400 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? Submit Answer Tries 0/3

Answer 1

3. Variable overhead = Total overhead - Fixed overhead

= (51,000 * $5.6) - $71,400

= $214,200

Variable overhead cost per unit = $214,200 / 51,000

= $4.2

Avoidable fixed cost = $71,400 - $44,268

= $27,132

Relevant costs to make = (Direct materials per unit + Direct labor per unit + Variable overhead per unit) * Units + Avoidable fixed cost + Opportunity cost of lost rent

= ($6.3 + $4.7 + $4.2) * 51,000 + $27,132 + $80,000

= $882,332

Relevant cost to buy = 51,000 * $17.02

= $868,020

Savings = $882,332 - $868,020

= $14,312

If Company Buy the Part instead of making it, it will save $14,312

4. Let the production level be X

(Direct materials per unit + Direct labor per unit + Variable overhead per unit) * Units + Avoidable fixed cost + Opportunity cost of lost rent = $17.02 X

($6.3 + $4.7 + $4.2) * X + $27,132 + $80,000 = $17.02 X

$1.82 X = $107,132

X = 58,864

If company Produce 58,864 units then it will be in indifferent between making and Buying the part