X Company is considering buying a part next year that they currently make. This year's production costs for 3,200 units were:
| |
Total |
Per-Unit |
| Materials |
$8,512 |
$2.66 |
| Direct labor [all variable] |
15,936 |
4.98 |
| Variable overhead |
10,880 |
3.40 |
| Fixed overhead |
9,920 |
3.10 |
| Totals |
$45,248 |
$14.14 |
A company has offered to supply this part for $13.38 per unit. If X Company buys the part, $4,960 of the fixed overhead can be avoided. Also if X Company buys the part, it can use the freed-up resources to increase production of another product, resulting in additional contribution margin of $2,700. Production next year is also expected to be 3,200 units.
3. If X Company buys the part instead of making it, it will save
4. X Company is uncertain what production will be next year. At what production level would it be indifferent between making and buying the part?