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 $16.47 per unit. Budgeted production in 2020 is 53,000 units, and budgeted per-unit production costs are: Materials $6.10 Direct labor 4.60 [all variable] Total 5.70 overhead Total $16.40 $90,100 of X Company's total overhead costs are fixed; $62,169 of the $90,100 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 3. If X Company buys the part instead of making it, it will save Tries 0/3 Submit Answer 4. At what production level would X company be indifferent between making and buying the part?
struggling with question 4

Answer 1

Solution 3:

Relevant cost of buying 53000 parts = 53000*$16.47 - $80,000 = $792,910

Variable overhead per unit = $5.70 - ($90,100/ 53000) = $4 per unit

variable cost to make per unit = $6.10 + $4.60 + $4 = $14.70

Relevant cost to make = Variable manufacturing costs + Avoidable fixed cost

= (53000*$14.70) + ($90,100- $62,169)

= $807,031

Net savings if company make the part = $807,031 - $792,910 = $14,121

Solution 4:

Let at X units, company will be indifferent in making and buying the part.

Now

$16.47 X - $80,000 = $14.70 X + $27,931

1.77 X = $107,931

X = $107,931 / 1.77 = 60978 units