Answer the following question(s)using the information below.Konrade's Engine Company manufactures part TE456 used in several of its engine models.Monthly production costs for 1,000 units are as follows:
It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier.Konrade's Engine Company has the option of purchasing the part from an outside supplier at $85 per unit.
-The maximum price that Konrade's Engine Company should be willing to pay the outside supplier is
A)$80 per TE456 part.
B)$82 per TE456 part.
C)$98 per TE456 part.
D)$100 per TE456 part.
E)$50 per TE456 part.

Question

Answer the following question(s)using the information below.Konrade's Engine Company manufactures part TE456 used in several of its engine models.Monthly production costs for 1,000 units are as follows:
  It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier.Konrade's Engine Company has the option of purchasing the part from an outside supplier at $85 per unit.
-The maximum price that Konrade's Engine Company should be willing to pay the outside supplier is
A)$80 per TE456 part. 
B)$82 per TE456 part. 
C)$98 per TE456 part. 
D)$100 per TE456 part. 
E)$50 per TE456 part.

Quizplus · Accepted Answer

To determine the maximum price that Konrade's Engine Company should be willing to pay the outside supplier, we need to compare the total cost of producing 1,000 units of TE456 in-house with the cost of purchasing them from the outside supplier.

Total cost of producing 1,000 units of TE456 in-house: 
Variable Costs = $20,000 ($20 per unit x 1,000 units) 
Fixed Costs = $10,000 ($100,000 fixed overhead costs assigned to TE456 ÷ 10) 
Total Cost = $30,000

Cost of purchasing 1,000 units of TE456 from outside supplier: 
$85,000

Therefore, the maximum price that Konrade's Engine Company should be willing to pay is the total cost of producing 1,000 units in-house, which is $30,000, divided by 1,000 units, which is $30 per unit. Since the outside supplier is offering to sell the part for $85 per unit, Konrade's Engine Company should only purchase from the outside supplier if they are willing to sell for less than $85 per unit. The best choice is option B, $82 per TE456 part, as this is less than $85 per unit.

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