Question

X Company is considering buying a part in 2020 that it made in 2019. For 2020, the budgeted production cost function is $11.05X+$12,000, where X is the number of units produced. A company has offered to supply this part to X Company for $14.20 per unit. If X Company accepts the offer, it will still incur fixed costs of $5,400, and it will not be able to do anything with the resources that were used to produce the part. In 2019, 3,000 units of the part were produced; in 2020, 3,300 units will be needed. 8 pt1. If X Company makes the part in 2020 instead of buying it, it will save EO $7,412 DO $5,930 CO $4,744 ВO 83,795 FO $9,265 1. AO $3,036 S at 2 At what production level would X Company be indifferent between making and buying the part in 2020? CO 1,073 ЕO 1676 DO 1,341 BO 858 FO 2,095 2. AO 687

Answer 1

Solution 1:

Relevant cost of buying 4000 parts = 3300*$14.20 = $46,860

Relevant cost to make = Variable manufacturing costs + Avoidable fixed cost

= (3300*$11.05) + ($12,000- $5,400)

= $43,065

Net savings if company make the part = $46,860 - $43,065 = $3,795

Hence option B is correct.

Solution 2:

Let at X units, company will be indifferent in making and buying the part.

Now

$14.20 X = $11.05 X + $6,600

X = $6,600 / $3.15

= 2095 units

Hence option F is correct.

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