A Company makes wheels which it uses in the production of children\'s wagons. Th

Question

A Company makes wheels which it uses in the production of children's wagons. The company's costs to produce 190,000 wheels annually are as follows:
Direct material $ 38,000
Direct labor 57,000
Variable manufacturing overhead 28,500
Fixed manufacturing overhead 67,000
Total $190,500
An outside supplier has offered to sell the company similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $22,000 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 $52,100 per year.
What is the highest price that the company could pay the outside supplier for each wheel and still be economically indifferent between making or buying the wheels? $1.04 or $.77 or $.99 or $1.00

Explanation / Answer

Cost to make wagon wheels: $190,500. Cost to buy wagon wheels: Price*190,000 + (67,000 – 22,000) – 52,100 = price*190,000 – 7,100 They will be indifferent when the costs are equal: 190,500 = price*190,000 – 7,100 Solve for price: 197,600 = price*190,000 Price = $1.04. Answer: $1.04.

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