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 $18.03 per unit. Budgeted production in 2020 is 52,000 units, and budgeted per-unit production costs are:
Materials | $6.50 |
Direct labor [all variable] | 5.80 |
Total overhead | 5.30 |
Total | $17.60 |
$78,000 of X Company's total overhead costs are fixed; $50,700 of
the $78,000 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 $80,000.
3. If X Company buys the part instead of making it, it will
save
Tries 0/3 |
4. At what production level would X company be indifferent between making and buying the part?
3) Differential analysis
Make | Buy | |
Direct material | 338000 | |
Direct labor | 301600 | |
Variable overhead | 197600 | |
Fixed overhead | 27300 | |
Opportunity Cost | 80000 | |
Purchase cost | 937560 | |
Total relevant cost | 944500 | 937560 |
it will save = 944500-937560 = 6940
Indifferent point
Manufacturing cost = Purchase cost
16.10X+107300 = 18.03X
-1.93X = -107300
X(Unit) = 55596 Units
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