Question

Calculate the selling price per unit charged by the outside supplier that would make ABC Company economically indifferent between making and buying the part. Enter your answer with two places after the decimal point (i.e., 78.90).

Answer 1

Question Completion:

ABC Company makes 40,000 units per year of a part it uses in the products it manufactures. The per unit product cost of this part is shown below:

Direct materials = $15.30

Direct labor =         27.40

Variable overhead   2.10

Fixed overhead =  24.70

Total =                 $69.50

An outside supplier has offered to sell ABC Company 40,000 units of this part a year for $66.10 per unit. If ABC Company accepts this offer, the facilities now being used to make this part could be used to make more units of a product that is in high demand. The additional contribution margin that could be earned on this other product would be $100,000 per year. If ABC Company accepts the outside supplier's offer, $21.90 of the fixed overhead cost being applied to the part would be eliminated. The remaining amount would continue to be incurred and would be allocated to the company's remaining products.

Calculate the selling price per unit charged by the outside supplier that would make ABC Company economically indifferent between making and buying the part. Enter your answer with two | places after the decimal point (i.e., $78.90)

Answer:

ABC Company

The selling price that the outside supplier would charge ABC Company to make it economically indifferent between making and buying the part is:

= $90.50

Explanation:

a) Data and Calculations:

Required annual quantity of the part = 40,000 units

Outside supplier's price per unit =                 $66.10

Total savings =                                                  24.40

Total price for ABC to be indifferent =         $90.50

Savings from outside supply:

Additional contribution ($100,000/40,000) = $2.50

Eliminated fixed costs =                                  $21.90

Total savings =                                                $24.40

b) ABC Company would be indifferent and equally satisfied if the outside supplier charges it $90.50 or it makes the part at a per-unit cost of $69.50 while it loses a benefit or savings (otherwise called opportunity cost) of $24.40.