Benton Company manufactures a part for its production cycle.The costs per unit for 38,000 units of the part are as follows:
$\begin{array}{ll}&\text { Per Unit }\
\text { Direct materials } & \$ 3.00 \
\text { Direct labor } & 5.00 \
\text { Variable factory overhead } & 3.00 \
\text { Fixed factory overhead } & \underline{4.00} \
\text { Total costs } & \$ 15.00
\end{array}$
The fixed factory overhead costs are unavoidable.Assume no other use for the facilities.What is the highest price Benton Company should pay for the part from an outside supplier?
A) $8
B) $11
C) $12
D) $15

Question

Quizplus · Accepted Answer

The highest price Benton Company should pay for the part from an outside supplier is the sum of the direct materials, direct labor, and variable factory overhead costs, which are $3.00 + $5.00 + $3.00 = $11.00. Fixed factory overhead costs are sunk costs and should not be considered in the decision for outsourcing, as they will be incurred regardless of whether the part is made internally or purchased externally.

Benton Company Manufactures a Part for Its Production Cycle The Fixed Factory Overhead Costs Are Unavoidable