Xebex Pty Ltd is considering whether to make or buy a component used in the production of Faz Machines. The annual cost of producing the 100 000 components used by the company is as follows.
If Xebex were to discontinue production of the component, direct fixed manufacturing costs would be reduced by 80 per cent.
Xebex should buy the 100 000 components if the cost of purchasing per unit is less than what amount?

Question

Xebex Pty Ltd is considering whether to make or buy a component used in the production of Faz Machines. The annual cost of producing the 100 000 components used by the company is as follows. 
If Xebex were to discontinue production of the component, direct fixed manufacturing costs would be reduced by 80 per cent.
Xebex should buy the 100 000 components if the cost of purchasing per unit is less than what amount?

Quizplus · Accepted Answer

To determine the cost of buying the component, we need to compare the annual cost of producing the component with the cost of purchasing 100,000 units.

Annual cost of producing the component = $920,000
If Xebex were to discontinue production, fixed manufacturing costs would be reduced by 80%, which is a savings of:
$800,000 x 0.8 = $640,000

Therefore, the total cost savings if Xebex were to discontinue production would be:
$920,000 + $640,000 = $1,560,000

The cost of purchasing 100,000 units can be calculated by taking the total cost savings and dividing it by the number of units:
$1,560,000 / 100,000 = $15.6

Therefore, Xebex should buy the 100,000 components if the cost of purchasing per unit is less than $15.6.

The only answer option that is less than $15.6 is C) $3.80, so the best choice is C).

Xebex Pty Ltd Is Considering Whether to Make or Buy