14. Ahron Company makes 8,000 units per year of a part it uses in the products i

Question

14. 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: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing cost 14.90 17.50 1.90 2110 S 55.40 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 igh 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 A. $49.50 part if the supplier commits to supplying all 8,000 units required each year? S62.00 $48.80 D. $55.40 E. None of the above

Explanation / Answer

B) $62

Maximum amount a company is willing to pay to outside supplier by shutting down its own production equals to the total avoidable costs of production.

Avoidable costs: (14.9 + 17.5 + 1.9 + 7.5) x 8000 = $334,400

Net Amount firm willing to Pay X

- Rent or other alternative use of vacant facility $161600

Maximum amount 334,400

X = $496000,

Per unit price = 496000 / 8000 = $62

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