Question

Premier Co. produces park equipment and is currently producing 10,000 park benches annually. A supplier has offered to produce the bench for Premier Co. for $500 per bench. Premier Co. incurs unit-level costs of $490 per unit. Premier also spends $50,000 on product design each year and incurs $100,000 of facility-level costs. Calculate the avoidable production cost for Premier Co. to produce 1 bench.

Answer 1

Answer:

$5

Explanation:

If Premier Co. incurs a unit-level cost of $490 per unit

Product design cost = $50000

Facility-level cost = $100000

No of units produced annually = 10000

Product design cost/unit = $50000/10000 = $5

Facility-level cost/unit = $100000/10000 = $10

Hence total production cost per unit = $490 + $5 + $10 = $505

However, the supplier is willing to produce the bench at $500 per unit

Thus avoidable production cost for 1 bench = $505 - $500 = $5