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: $5.80 5.40 Materials Direct labor (all variable] 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. 3. If X Company buys the part instead of making it, it will save #TEK Tries 0/3 4. At what production level would X company be indifferent between making and buying the part? ( H Tries 0/3

Answer 1

3)

	Make	Buy	Net income
Direct Materials (50000*$5.80)	$290000		$290000
Direct Labor (all variable) (50000*$5.40)	270000		270000
Variable overhead (50000*$5.60-90000)	190000		190000
Fixed costs	90000	63000	27000
Opportunity cost	75000		75000
Purchase price (50000*$16.74)		837000	-837000
Total relevant cost	$915000	$900000	$15000

Variable overhead cost per unit= ($5.60*50000-90000)/50000= $3.80

If company buys the part instead of making it, it will save= $852000-837000= $15000

4) Total variable cost per unit= Direct materials+Direct labor+Variable overhead

= $5.80+5.40+3.80= $15

16.74X+63000= 15X+90000+75000

16.74X-15X= $90000+75000-63000

1.74X= $102000

X= 58621 units

where, X is the production level.