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 $15.52 per unit. Budgeted production in 2020 is 55,000 units, and budgeted per-unit production costs are Materials 85.70 Direct labor [all variable Total overhead 4.20 5.00 $14.90 Total $71,500 of X Company's total overhead costs are fixed; $43,615 of the $71,500 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 $80,000 8 pt 3. If X Company buys the part instead of making it, it will save 3. AO $2,285 FO $4,210 EO $3,726 BO $2,582 DO $3,297 CO $2,918 8 pt 4. At what production level would X company be indifferent between making and buying the part? 4. AO 49,726 BO 56,190 EO 81,077 FO 91,616 DO 71,749 CO 63,495

Answer 1

3.A.$2,285.

working:

	make	buy	difference
purchase price ($15.52*55,000)	nil	853,600
direct materials ($5.70*55,000)	313,500
direct labor ($4.20*55,000)	231,000
relevant fixed overhead (71,500 - 43,615)	27,885
variable overhead (55,000* 5 ) - 71,500 of fixed overhead	203,500
opportunity cost (rent of equipment)	80,000
total cost	855,885	853,600	2,285

4.b.56,190

at indifference point both the alternative will cost the same:

let x be the indifference point:

fixed elements under make alternative are 27,855 +80,000 opportunity cost

=>107,885.

variable portion of fixed cost = ((5*,55,000) - 71,500) / 55,000 units

=>$3.70

total variable portion of make alternative = 5.70+4.20+3.7

=>$13.60.

buying alternative is fully variable @$15.52 per unit.

at indifference point:

13.60x +107,885 = 15.52 x

=>1.92x =>107,885.

=>x =56,190...