Question: X Company is considering buying a part next year that they currently make. This year's production costs for 3,500 units were:
|
Total |
Per-Unit |
| Direct materials |
$13,825 |
$3.95 |
| Direct labor |
11,060 |
3.16 |
| Variable overhead |
11,900 |
3.40 |
| Fixed overhead |
11,900 |
3.40 |
| Total |
$48,685 |
$13.91 |
A company has offered to supply this part for $12.99 per unit. If X Company buys the part, $6,783 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 $2,100. Production next year is expected to be 4,000 units.
2. If X Company continues to make the part instead of buying it, it will save?
3. X Company is uncertain what production will be next year. What production level would make X Company indifferent between making and buying the part?