Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs: $$\begin{array} { l r }
\text { Direct Materials } & \$ 13,000 \
\text { Direct Labor } & 15,000 \
\text { Variable Overhead } & 3,000 \
\text { Fixed Overhead } & 7,000
\end{array}$$ Crigui could avoid $4,000 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major consideration and the company would prefer to buy the 60,000 units externally, what is the maximum external price that Crigui would expect to pay for the units?
A) $34,000
B) $31,000
C) $38,000
D) $35,000

Question

Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs: $$\begin{array} { l r } 
\text { Direct Materials } & \$ 13,000 \
\text { Direct Labor } & 15,000 \
\text { Variable Overhead } & 3,000 \
\text { Fixed Overhead } & 7,000
\end{array}$$ Crigui could avoid $4,000 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major consideration and the company would prefer to buy the 60,000 units externally, what is the maximum external price that Crigui would expect to pay for the units?
A) $34,000
B) $31,000
C) $38,000
D) $35,000

Quizplus · Accepted Answer

The total cost to produce the CDs internally is the sum of direct materials, direct labor, variable overhead, and fixed overhead: $13,000 + $15,000 + $3,000 + $7,000 = $38,000. If Crigui can avoid $4,000 in fixed overhead by buying externally, the maximum it would be willing to pay externally without increasing costs is $38,000 - $4,000 = $34,000. However, this is the break-even point, not the maximum they would be willing to pay. To find the maximum external price, you consider the total costs they are willing to cover, which includes the avoidable fixed overhead. Since the question asks for the maximum external price Crigui would expect to pay, and given that avoiding $4,000 in fixed overhead costs is already factored into their internal costs, the correct interpretation is that the maximum external price would be equal to their current total costs without needing to reduce it further by the avoidable fixed overhead. Therefore, the maximum external price Crigui would be willing to pay is the total internal production cost of $38,000.

Crigui Music Produces 60,000 CDs on Which to Record Music