Question

Harmony is currently producing 100 component parts and incurring costs of $60,000 for direct materials, $12,500 for direct labor, $22,500 for variable overhead, and $15,000 for fixed overhead. If Harmony purchases these components from an external vendor, $10,000 of fixed costs would be eliminated.
What is the maximum amount that Harmony would be willing to pay the external vendor for these 100 component parts?

Answer 1

Answer:

he maximum that Harmony would be willing to pay the external vendor for these 100 component parts is $100,000

Explanation:

Consider the Adjustment on the Cost of Manufacturing taking into account the cut in fixed cost that results from purchasing these components from an external vendor.

Cost of Manufacturing - Adjusted

direct materials                                     $60,000

direct labor                                            $12,500

variable overhead                                $22,500

fixed overhead ( $15,000 - $10,000)    $5,000

Total                                                     $100,000

Thus the maximum that Harmony would be willing to pay the external vendor for these 100 component parts is $100,000

Answer 2

Answer: $100,000

Explanation:

This question is essentially asking how much it would cost to produce the good internally if costs were $10,000 less.

So to calculate that we'll add the entire cost of Production and subtract by $10,000.

= 60,000 + 12,500 + 22,500 + 15,000 - 10,000

= $100,000

$100,000 is the maximum amount that Harmony would be willing to pay the external vendor for these 100 component parts. If Harmony pays more, they wouldn't be taking advantage of the amount of fixed costs eliminated.