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 $16.74 per unit. Budgeted production in 2020 is 50,000 units, and budgeted per-unit production costs are: X Company is considering buying a part in 2020 that it made in 2019. For 2020, the budgeted production cost function is $10.46X + $17,360, where X is the number of units produced. A company has offered to supply this part to X Company for $13.60 per unit. If X Company accepts the offer, it will avoid fixed costs of $8,854, but it will not be able to do anything with the resources that were used to produce the part. In 2019, 3,100 units of the part were produced; in 2020, 3,500 units will be needed. $5.80 Materials Direct labor (all variable) 5.40 Total overhead Total 5.60 $16.80 $90,000 of X Company's total overhead costs are fixed; $63,000 of the $90,000 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 $75,000. 1. If X Company makes the part in 2020 instead of buying it, it will save 1986* Tries 0/3 2. At what production level would X Company be indifferent between making and buying the part in 2020? * Tries 0/3 3. If X Company buys the part instead of making it, it will save ARM Tries 0/3 4. At what production level would X company be indifferent between making and buying the part? 20 ** Tries 0/3

Answer 1

1)

Cost of Making	(3,500 x 10.46)+17,360 = 53,970	53,970.00
Cost of Buying	(3,500 x 13.60)+ 8,506 = 56,106	56,106.00
Saving		2,136.00

2) 10.46X + 17,360 = 13.60 X + 8,506

=3.14X = 8,854

=2,819.75 Units

3)  

Cost of Making	(50,000 x 16.80) = 53,970	840,000.00
Cost of Buying	(50,000 x 16.74) +63,000 -75,000 = 56,106	825,000.00
Saving		15,000.00

4)15X + 90,000 = 16.74X + 63,000 - 75,000

1.74X =102,000

X = 58,620.69 Units