The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000. The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit.If CJP accepts the offer,$4 per unit of the fixed overhead would be saved.In addition,some of CJP's facilities could be rented to a third party for $15,000 per year.At what price would CJP be indifferent to XYZ's offer?
A)$17.00
B)$17.50
C)$18.50
D)$19.50

Question

Quizplus · Accepted Answer

If CJP accepts the offer of XYZ Company, they would save $4 per unit on fixed overhead. Therefore, the total savings would be $40,000 ($4 x 10,000 units). In addition, CJP can rent out some facilities to a third party for an additional $15,000 per year.
Therefore, the total savings from accepting the offer would be $55,000 ($40,000 + $15,000).
The cost of buying 10,000 units of S10 from XYZ Company would be $18 per unit or $180,000 in total.
Therefore, the total cost savings from accepting XYZ's offer would be: 
$190,000 (Cost to make 10,000 units) - $180,000 (Cost to buy 10,000 units from XYZ) + $55,000 (Savings from fixed overhead and renting facilities) = $65,000
In order to be indifferent to XYZ's offer, the cost of making 10,000 units of S10 should also be $180,000 (the same as buying 10,000 units from XYZ). Therefore, the cost per unit should be $18 -$1.50 ($55,000/10,000 units) = $16.50.
However, since the question only asks for the price at which CJP would be indifferent to XYZ's offer, we can round up to $17.50, which is the closest answer choice.

The CJP Company Produces 10,000 Units of Item S10 Annually