Question

Elly Industries is a multi-product company that currently manufactures 30,000 units of part MR24 each month for use in production of its products. The facilities now being used to produce part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per month. If Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40% of their present amount. The variable production costs of Part MR24 are $11 per unit.
Required:
1. If Elly Industries continues to use 30,000 units of part MR24 each month, it would realize a financial advantage by purchasing this part from an outside supplier only if the supplier's unit price is less than ____________.

Answer 1

Answer:

would realize a financial advantage by purchasing this part from an outside supplier only if the supplier's unit price is less than _$14__.

Explanation:

Elly industries.

Current cost of production by producing in-house:

Quantity of MR24 produced = 30,000

Variable cost of $11 per unit = $330,000

Fixed Costs = $150,000

Total cost of production = $480,000

If we purchase the 30,000 pieces from outside producer;

The maximum price that will give us an advantage is the one that will ensure our Current Cost of Production and the new costs of goods available (based on outsourced production) matches.

40% of Fixed Costs will remain incurred from Elly's factory = $150,000 x 40% = $60,000

This leaves $480,000 minus $60,000 ($420,000) as the maximum costs that the outsource firm can charge for the contract to make sense.

= $420,000 / 30,000 units

= $14 per unit