Answer the following question(s)using the information below.Schmidt Corporation produces a part that is used in the manufacture of one of its products.The costs associated with the production of 10,000 units of this part are as follows:
Of the fixed factory overhead costs, $30,000 is avoidable.
-Assuming accepting the offer creates excess facility capacity that can be used to produce 2,000 units of another product that has a unit selling price of $24, variable costs of $12, and fixed cost allocation of $3.What is the highest price that Schmidt should be willing to pay Phil Company for 10,000 units of the part?
A)$146,000
B)$164,000
C)$152,000
D)$134,000
E)$140,000

Question

Answer the following question(s)using the information below.Schmidt Corporation produces a part that is used in the manufacture of one of its products.The costs associated with the production of 10,000 units of this part are as follows:
  Of the fixed factory overhead costs, $30,000 is avoidable.
-Assuming accepting the offer creates excess facility capacity that can be used to produce 2,000 units of another product that has a unit selling price of $24, variable costs of $12, and fixed cost allocation of $3.What is the highest price that Schmidt should be willing to pay Phil Company for 10,000 units of the part?
A)$146,000 
B)$164,000 
C)$152,000 
D)$134,000 
E)$140,000

Quizplus · Accepted Answer

The highest price Schmidt should be willing to pay is the cost savings from not producing the part in-house plus the contribution margin from the additional product. The contribution margin from the additional product is (24 - 12) * 2,000 = $24,000. The fixed cost allocation is not relevant as it does not change. Therefore, the highest price Schmidt should be willing to pay is $140,000 (cost savings) + $24,000 (contribution margin) = $164,000.

Answer the Following Question(s)using the Information Below