Question

Ahrends Corporation makes 59,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials $ 20.80 Direct labor 26.50 Variable manufacturing overhead 6.90 Fixed manufacturing overhead 36.10 Unit product cost $ 90.30 An outside supplier has offered to sell the company all of these parts it needs for $76.60 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $472,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $31.40 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 59,000 units required each year

Answer 1

Answer: $66.90 per unit

Explanation:

Cost that would be avoided is:

= Direct materials + Direct cost + Variable manufacturing overhead + part of fixed manufacturing overhead

= 20.80 + 26.50 + 6.90 + (36.10 - 31.40)

= $58.90

If the outside supplier commits to 59,000 units a year, the company should not pay more than:

= (Number of units supplied * Avoidable cost + contribution margin on other product (opportunity cost) ) / Number of units supplied

= (59,000 * 58.90 + 472,000) / 59,000

= $66.90 per unit