Question
X Company is considering buying a part next year that they currently make. This year's per-unit production costs for 3,300 units were: Materials $2.90 Direct
X Company is considering buying a part next year that they currently make. This year's per-unit production costs for 3,300 units were:
Materials | $2.90 |
Direct labor [all variable] | 3.06 |
Variable overhead | 4.30 |
Fixed overhead | 5.40 |
Total production costs | $15.66 |
A company has offered to supply this part for $12.76 per unit. If X Company buys the part, $9,445 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 $2,000. Production next year is also expected to be 3,300 units.
1) If X Company buys the part instead of making it, it will save _______
2) At what production level would X Company be indifferent between making and buying the part?
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