Question

Ruth Company produces 1,000 units of a necessary component with the following costs: Direct Materials $34,000 Direct Labor 15,000 Variable Overhead 9,000 Fixed Overhead 10,000 Ruth Company could avoid $6,000 in fixed overhead costs if it acquires the components externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Ruth Company would accept to acquire the 1,000 units externally? A. $59,000 B. $64,000 C. $62,000 D. $58,000

Answer 1

Answer:

Option B is correct

The maximum price to be paid is = $64000

Explanation:

To determine the the maximum price we would compute using the relevant costs of internal production.

The maximum price to be paid to external supplier should be the total relevant costs associated with internal production.

Total relevant cost of internal production = 34,000 + 15,000 +9000 + 6000

The maximum price to be paid is = $64000

Note that the fixed overhead  of $6000 is associated with the internal production the balance of 4,000 is irrelevant and would be incurred either way.