X Company is considering buying a part in 2020 that it made in 2019. For 2020, the budgeted production cost function is $10.43X + $9,000, where X is the number of units produced. A company has offered to supply this part to X Company for $13.66 per unit. If X Company accepts the offer, it will still incur fixed costs of $4,770, and it will not be able to do anything with the resources that were used to produce the part. In 2019, 3,000 units of the part were produced; in 2020, 3,400 units will be needed.
1. If X Company makes the part in 2020 instead of buying it, it will save?
2. At what production level would X Company be indifferent between making and buying the part in 2020?
1.
Total cost of making 3,400 units in 2020 = 10.43X + 9,000
= 10.43 x 3,400 + 9,000
= 35,462+9,000
= $44,462
Total cost of buying 3,400 units in 2020 = 13.66 X + 4,770
= 13.66 x 3,500 + 4,770
= 46,444+4,770
= $51,214
If X company makes the part in 2020 instead of buying it, it will save = Total cost of buying 3,400 units in 2020 - Total cost of making 3,400 units in 2020
= 51,214-44,462
= $6,752
2.
Let the production level of K units, total cost of making and buying is same.
Total cost of making = Total cost of buying
10.43K + 9,000 = 13.66K+4,770
13.66K-10.43K = 9,000-4,770
3.23K = 4,230
K = 1,310
Hence, X company will be indifferent between making and buying the part it production level of 1,310 units.
Kindly comment if you need further assistance. Thanks‼!
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