Everlast Co. manufactures a variety of drill bits. The company's plant is partially automated. The budget for the year includes
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Answer:
Indifferent Purchase price per wheel = $123,200/110,000 = $1.12
Explanation:
Provided that:
Number of wheels produced: 110,000
Cost for these wheels in case of manufacturing
Direct Material = $22,000
Direct Labor = $33,000
Variable Manufacturing Overhead = $16,500
Fixed Manufacturing Overhead = $59,000
Total Cost = $130,500
Rate of outside supplier = $0.80
Then total cost in case of purchase = Purchase cost + Unavoidable fixed cost - Rent Revenue
= $0.80 110,000 + ($59,000 - $14,000) - $37,700
= $88,000 + $45,000 - $37,700
= $95,300
since net effect of buying the wheels is a gain of $130,500 - $95,300 = $35,200
Thus the wheels shall be bought and not manufactured.
The price at which the buying and manufacturing option will be indifferent shall be:
Purchase Price + Unavoidable Fixed Cost - Rent Revenue = Manufacturing cost
Purchase Price + $45,000 - $37,700 = $130,500
Purchase Price = $123,200
Purchase price per wheel = $123,200/110,000 = $1.12