Pett Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows:
Of the fixed factory overhead costs, $15,000 is avoidable.
-Assuming no other use of their facilities, the highest price that Pett should be willing to pay for 5,000 units of the part is
A) $105,000.
B) $70,000.
C) $85,000.
D) $60,000.

Question

Pett Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows:
  Of the fixed factory overhead costs, $15,000 is avoidable.
-Assuming no other use of their facilities, the highest price that Pett should be willing to pay for 5,000 units of the part is
A) $105,000. 
B) $70,000. 
C) $85,000. 
D) $60,000.

Quizplus · Accepted Answer

The total cost for producing 5,000 units of the part is:
Direct materials + Direct labor + Variable factory overhead + Fixed factory overhead (avoidable) = $20,000 + $25,000 + $10,000 + $15,000 = $70,000
This cost is the minimum amount that Pett Company should charge for the 5,000 units of the part they produce. Therefore, the highest price that Pett should be willing to pay for 5,000 units of the part is also $70,000. 
Choice C is the only one that matches this amount.

Pett Company Produces a Part That Is Used in the Manufacture