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 $16.12 per unit. Budgeted production in 2020 is 58,000 units, and budgeted per-unit production costs are:

Materials	$6.10
Direct labor [all variable]	4.60
Total overhead	4.90
Total	$15.60

$75,400 of X Company's total overhead costs are fixed; $58,812 of the $75,400 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 $70,000.

3. If X Company continues to make the part instead of buying it, it will save

Tries 0/3

4. At what production level would X company be indifferent between making and buying the part?

Tries 0/3

Answer 1

differential analysis is carried out to select the best option among given alternatives

differential analysis calculates incremental cash flow to find out the best option.

3. cost of making

variable cost+fixed cost+opportunity cost of making the product

here $70,000 is an opportunity cost as the equipment cannot be rented if the product is made.

=($15.60*58000units)+$70000

=$974,800

cost of buying

variable cost + unavoidable fixed cost

=[$16.12*58000UNITS]+$58,812

=$993,772

As you can see that cost of buying is more than cost of making

If X Company continues to make the part instead of buying it, it will save

cost of buying-cost of making

=$993,772-$974,800

=$18,972

4]suppose the level of production is X

variable overhead costs = total overhead- fixed overhead

=4.90*58000 -$75,400

=$208,800

variable overhead per unit = 208,800/58000units=$3.6

variable cost = material + labor+variable overhead = $6.10+$4.6+$3.6 =$14.3

fixed cost are constant so they will remain unchanged =$75,400

indifferent level is the units at which cost of buying will equal the cost of making

cost of making = cost of buying

($14.3X)+$75,400+$70000 = 16.12X +$58,812

1.82x=86,588

x=47576 units

At 47576 units company will be indifferent between buying or making.