Jenna’s Jeans produces 40,000 pairs of jeans each month for a total cost of $500
ID: 2424047 • Letter: J
Question
Jenna’s Jeans produces 40,000 pairs of jeans each month for a total cost of $500,000. The costs are described below. Manufacturing overhead is 40% variable.
Direct materials
$200,000
Direct labor
180,000
Manufacturing overhead
120,000
Total
$500,000
Zippers represent an important component of jeans. Jenna currently makes the zippers for her jeans, but she has considered purchasing them from Zacchaeus’s Zippers instead. Jenna’s current monthly cost for zippers are as follows:
Direct materials
$5,000
Direct labor
15,000
Manufacturing overhead
20,000
Total
$40,000
If Jenna purchases zippers instead of making them, she can avoid 60% of the manufacturing overhead related to zippers. Additionally, discontinuing the zippers will allow Jenna to produce and sell 4,000 more jeans each month. What is the highest price Jenna can pay Zacchaeus for each zipper, such that buying zippers is would be better than making them?
Direct materials
$200,000
Direct labor
180,000
Manufacturing overhead
120,000
Total
$500,000
Explanation / Answer
Jenna has to make out of pocket expense to make 40000 zippers per month = $5000 + 15000 + 12000 = $32000
So, Jenna can pay Zacchaeus for each zipper a highest price of = $32000 / 40000 = $0.80 per zipper
Other benefits to Jenna is that it able to produce and sell 4,000 more jeans each month.
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