Question

Questions 1 and 2 refer to the following information: X Company is considering buying a part in 2020 that it made in 2019. For 2020, the budgeted production cost function is $11.23X + $17,670, where X is the number of units produced. A company has offered to supply this part to X Company for $14.71 per unit. If X Company accepts the offer, it will still incur fixed costs of $9,188, and 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. 8 pt 1. If X Company makes the part in 2020 instead of buying it, it will save 1. AO $1,974 BO $2,309 CO $2,702 DO 83,161 EO $3,698 FO $4,327 8pcb. At what production level would X Company be indifferent between making and buying the part in 2020? 2. A 1,560 BO 1,950 CO 2,437 DO 3,047 EO 3,808 FO 4,760 Questions 3 and 4 refer to the following information: 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 $15.96 per unit. Budgeted production in 2020 is 60,000 units, and budgeted per-unit production costs Are Materials Direct labor (all variable] Total overhead Total S5.10 5.90 5.00 $16.00 $102,000 of X Company's total overhead costs are fixed; $75,480 of the $102,000 are unayoidable 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 $70,000. 8 pt 3. If X Company continues to make the part instead of buying it, it will save 3. AO $1.252 BO $1,577 CO $1,971 DO 82,464 EO $3,080 FO $3,850 8 pt 4. At what production level would X company be indifferent between making and buying the part? 4. AO 26,520 BO 31,029 CO 36,304 DO 42,475 EO 19,696 FO 58,145

Answer 1

1.Relevant cost of making is equal to the avoidable cost

Savings = Cost of buying – relevant cost of making

= 3500*14.71 – 3500*11.23 – 8482

= $3,698

i.e. E

Indifference point = Avoidable fixed cost/Difference in variable cost

= 8482/3.48

= 2437.36 units

i.e. C

Savings = 60,000*15.96 – (5.10+5.90+3.3)*60,000 – 26,520-70,000

= $3,080

i.e. E

Indifference point = 96,520/1.66

= 58,145 units

i.e. F