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 $17.06 per unit. Budgeted production in 2020 is 50,000 units, and budgeted per-unit production costs are:

Materials	$7.00
Direct labor [all variable]	4.60
Total overhead	4.80
Total	$16.40

$55,000 of X Company's total overhead costs are fixed; $35,200 of the $55,000 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

Tries 0/3

4. At what production level would X company be indifferent between making and buying the part?

Tries 0/3

Answer 1

3) Differential analysis

	Make	Buy
Direct material	350000
Direct labor	230000
Variable overhead	185000
Fixed overhead	19800
Opportunity Cost	75000
Purchase cost		853000
Total relevant cost	859800	853000

it will save = 859800-853000 = 6800

4) Indifferent point

Manufacturing cost = Buying cost

15.30X+94800 = 17.06X

-1.76X = 94800

X(indifferent point) = 53864 Units