Question

Main Menu Contents Grades O Timer Notes Evaluate Course Contents SECOND CHANCE EXAM 2 Questions 3 & 4 Print info Feedback 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 $16.67 per unit. Budgeted production in 2020 is 58,000 units, and budgeted per-unit production costs are: Materials $6.30 Direct labor [all variable] Total overhead 6.00 4.40 Total $16.70 $98,600 of X Company's total overhead costs are fixed; $67,048 of the $98,600 are unavoidable even if it buys the part. Also, if X Company buys the part, t 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 Tries 0/3 Submit Answr 4, At what production level would X company be indifferent between making and buying the part? Tries 0/3 Sutmih Anwer Communication Blocked Send Feedback

Answer 1

Budgeted Production = $58,000 Units

Budgeted Over Head Per unit = $ 4.4

Total Overhead = $ 4.4 * 58,000 = $255,200

Fixed Overhead given = $98,600

Variable Overhead = $255,200-$98,600 = $156,600

Variable Overhead per unit = $156,600/58,000 = $2.7 per unit

(i) Savings if Company buys product insted of making:

Since amount of $67,048 are unavoidable even if we purchase product, they are not considered as savings in fixed costs

	Particulars	Remarks	per unit	For 58,000 Units
(A)	Purchase price		$ (16.67)	$    (966,860.00)
(B)	Saving in Material Cost		$      6.30	$      365,400.00
(C)	Saving in Direct labor		$      6.00	$      348,000.00
(D)	Saving in Variable Overhead		$      2.70	$      156,600.00
(E)	Total savings per unit	[A+B+C+D]	$    (1.67)	$      (96,860.00)
(F)	Savings in Fixed Cost	=98,600-67,048		$        31,552.00
(G)	Rent on Equipment			$        75,000.00
(H)	Total Savings	[E+F+G]		$          9,692.00

(ii) Indifference point of making or buying:

Additional cost incurred per unit if the company purchases the product = $ (1.67) [From (E) of above table]

Additional revenue by rent on equipment and Savings in fixed Cost = $ 31,552 + $ 75,000 = $ 106,552 [From (F) and (G) of above table]

Indifference point = Additional revenue (Fixed)/ Additional Cost incurred per unit (Variable) = $106,552/$1.67=63,803.59 units