Question

Benton Company manufactures a part for its production cycle. The costs per unit for 38,000 units of the part are as follows: Direct Materials $3.00/unit Direct Labor $5.00/unit Variable Factory Overhead $3.00/unit Fixed Factory Overhead $4.00/unit Total Costs $15.00/unit The fixed factory overhead costs are unavoidable. Assume no other use for the facilities. What is the highest price Benton Company should pay for the part from an outside supplier

Answer 1

Answer: $418,000

Explanation:

The Fixed costs are unavoidable so even if Brenton bought from an outside supplier they would still incur it.

It is therefore not a relevant cost.

The cost of producing internally therefore is;

= 3 + 5 + 3

= $11 per unit

Cost = 38,000 * 11

= $418,000

Maximum they should pay for the part outside is $418,000. Anything more and they would be better off producing for themselves.