X Company is considering buying a part next year that they
currently make. This year's production costs for 3,500 units were
as follows:
Per-Unit | Total | ||
Direct materials | $3.41 | $11,935 | |
Direct labor | 4.65 | 16,275 | |
Variable overhead | 2.50 | 8,750 | |
Fixed overhead | 6.00 | 21,000 | |
Total | $16.56 | $57,960 |
A company has offered to supply this part to X Company for $13.71
per unit. If X Company accepts the offer, it will still incur fixed
costs of $10,290, but it will be able to lease the resources that
will become available from not making the part for $2,800. At what
production level would X Company be indifferent between making and
buying the part next year?
Let the number of units sold be S.
Total cost to make = (S X $10.56) + $21,000
Total cost to buy = (S X $13.71) + $10,290 - $2,800
(S X 10.56) + $21,000 =
(S X $13.71) + $10,290 - $2,800
10.56S + $21,000 = $13.71S + $7,490
$21,000 - $7,490 = $13.71S - $10.56S
$13,510 = $3.15S
S = $13,510 / $3.15
S = 4289 units
X Company is considering buying a part next year that they currently make. This year's production...
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