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

Quizplus · Accepted Answer

To determine whether Xebex should make or buy the component, we need to compare the cost of producing the component with the cost of purchasing it.

Annual cost of producing 100,000 components = $150,000 + $50,000 + $100,000 = $300,000

If Xebex were to discontinue production of the component, the direct fixed manufacturing costs would be reduced by 80%, which means the new fixed costs would be:

$50,000 × 0.2 = $10,000

Therefore, the total cost of producing 100,000 components would be:

Cost = $150,000 + $10,000 + ($2 × 100,000) = $270,000

This means that Xebex should buy the 100,000 components if the cost of purchasing per unit is less than:

$270,000 ÷ 100,000 = $2.70

However, we need to add a profit margin to the purchasing cost to make the purchase worthwhile. Let's assume a profit margin of $1 per unit. This means that Xebex should buy the 100,000 components if the cost of purchasing per unit is less than:

$2.70 + $1 = $3.70

The only option that is less than $3.70 is C) $3.80, so the best choice is C.

Xebex Pty Ltd Is Considering Whether to Make or Buy