Question

X Company is considering buying a part in 2020 that it made in 2019. For 2020, the budgeted production cost function is $10.21X + $11,550, where X is the number of units produced. A company has offered to supply this part to X Company for $13.45 per unit. If X Company accepts the offer, it will still incur fixed costs of $5,198, and it will not be able to do anything with the resources that were used to produce the part. In 2019, 3,300 units of the part were produced; in 2020, 3,700 units will be needed.

1. If X Company makes the part in 2020 instead of buying it, it will save

Tries 0/3

2. At what production level would X Company be indifferent between making and buying the part in 2020?

Tries 0/3

Answer 1

If company makes the unit ; cost function = 10.21x + $11,550

If it buys the unit cost will be 13.45x +5198

For 3700 units manufacturing cost = 49327

If it buys the same unit , it will cost 13.45*3700 + 5198 = $54,963

1.Net saving in manufacturing = $54,963-$49327 = $5,636

2. For indiffernce level both the cost functions shall be equal

10.21x + $11550 = 13.45x + $5,198

solving above equation x = 1960.49 units