Question

10. Ahron Company makes 8,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of the units it needs. 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 $161,600 per year. If the part were purchased from the outside supplier, $7.50 of the fixed manufacturing overhead cost being applied to the part would be eliminated. 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 8,000 units required each year

Answer 1

Answer:

$62

Explanation:

The computation of the maximum amount that should be willing to pay per unit is as follows:

The Relevant costs for decision making is

= Avoidable Costs + Opportunity Costs

where,

Total Avoidable Cost = Total Units Needed × ( Direct Materials + Direct Labor + Variable Manufacturing Overhead + Avoidable Fixed Manufacturing Overhead )

= 8,000 ×  ($14.90 + $17.50 + $1.90 + $7.50)

= $334,400.

And,  the Total Opportunity Costs of Making is $161,600.

Now

Total Relevant Costs is

= $334,400 + $161,600

= $496,000.

So, the maximum per unit would be

= $496,000 ÷ 8,000

= $62