Talboe Company makes wheels which it uses in the production of children\'s wagon
ID: 2378522 • Letter: T
Question
Talboe Company makes wheels which it uses in the production of children's wagons. Talboe's costs to produce 150,000 wheels annually are as follows:
Direct material
$ 30,000
Direct labor
45,000
Variable manufacturing overhead
22,500
Fixed manufacturing overhead
63,000
Total
$160,500
An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $18,000 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the wheels would be rented to another company for $46,500 per year.
What is the highest price that Talboe could pay the outside supplier for each wheel and still be economically indifferent between making or buying the wheels? (Round your answer to 2 decimal places.)
Direct material
$ 30,000
Direct labor
45,000
Variable manufacturing overhead
22,500
Fixed manufacturing overhead
63,000
Total
$160,500
Explanation / Answer
Total cost when manufactured internally = 160,500
Let the highest price that Talboe could pay the outside supplier = p
Direct material, Direct labor, Variable manufacturing overhead will be eliminated
Total cost if wheel bought from supplier = p*150,000 +(63,000-18000) = p*150000+45000
For the indifference level
p*150000+45000 - 46,500 =160,500
p= 1.08 per unit
highest price that Talboe could pay the outside supplier for each wheel= 1.08 per unit
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