Question

X Company is considering buying a part in 2020 that it made in 2019. For 2020, the budgeted production cost function is $12.66X + $14,400, where X is the number of units produced. A company has offered to supply this part to X Company for $15.76 per unit. If X Company accepts the offer, it will avoid fixed costs of $7,056, but 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, 3,500 units will be needed. 1. If X Company makes the part in 2020 instead of buying it, it will save Submit Answer Tries 0/3 2. At what production level would X Company be indifferent between making and buying the part in 2020? Submit Answer Tries 0/3

Answer 1

1) Differential analysis

	Make	Buy
variable cost	12.66*3500 = 44310
Fixed cost	7056
Purchase		3500*15.76 = 55160
Total relevant cost	51366	55160

It will save = 55160-51366 = 3794

2) Indifferent point

Manufacturing cost = Purchase cost

12.66X+7056 = 15.76X

-3.1X = -7056

X(indifferent point) = 2276 Units