X Company currently buys a part from a supplier for $14.09 per
unit but is considering making the part itself next year. This
year, they purchased 3,400 units of this part.Estimated costs to
make the part are:
Per-Unit | Total | ||
Direct materials | $3.96 | $13,464 | |
Direct labor | 3.80 | 12,920 | |
Variable overhead | 4.20 | 14,280 | |
Fixed overhead | 5.30 | 18,020 | |
Total | $17.26 | $58,684 |
Of the estimated fixed overhead, $6,667 are common costs that would
be allocated to the part; the rest would be additional fixed
overhead costs. X Company currently rents unused factory space to a
tenant for $2,500; it will have to use this space to make the
part.
3. X Company is somewhat uncertain how many units of the part it will need next year. How many units would make the company indifferent between continuing to buy the part and making it?
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Please find below the answer | |||
Statementshowing Computations | |||
Paticulars | Make | Buy | Differential |
Purchase cost = 3400*14.09 | 47,906.00 | (47,906.00) | |
Direct materials = 3400*3.96 | 13,464.00 | 13,464.00 | |
Direct Labour =3400*3.80 | 12,920.00 | 12,920.00 | |
Variable overhead= 3400*4.20 | 14,280.00 | 14,280.00 | |
Relevant Fixed overhead=3400*5.30-6667 | 11,353.00 | 11,353.00 | |
Loss of rent | (2,500.00) | 2,500.00 | |
Total relevant costs | 52,017.00 | 45,406.00 | 6,611.00 |
Company should buy as it will save 6,611 | |||
Variable cost in making =3.96+3.80+4.20 | 11.96 | ||
Relevant Fixed overhead in making | 11,353.00 | ||
Loss of rent | 2,500.00 | ||
Variable cost of buy | 14.09 | ||
3) | |||
Indifference point = (11353+2500)/(14.09-11.96) | 6,503.76 | ||
Thus answer is 6,504 Units | |||
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