Ahsan Company makes 60,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $45.70 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $318,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $3.50 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

-What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 60,000 units required each year?
A)$40.50
B)$42.30
C)$45.80
D)$5.30

Question

Ahsan Company makes 60,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:  An outside supplier has offered to sell the company all of these parts it needs for $45.70 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $318,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $3.50 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

-What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 60,000 units required each year?
A)$40.50 
B)$42.30 
C)$45.80 
D)$5.30

Quizplus · Accepted Answer

To determine the maximum amount the company should be willing to pay an outside supplier, we need to calculate the relevant cost of producing the part in-house. Using the given information, the relevant cost per unit is:

Direct materials cost = $12.00
Direct labor cost = $10.50
Variable overhead cost = $4.80
Fixed overhead cost = $7.20 / 15,000 units = $0.48
Total relevant cost = $12.00 + $10.50 + $4.80 + $0.48 = $27.78

Since the outside supplier is willing to supply all 60,000 units required each year, the company can avoid the fixed overhead cost associated with producing the part in-house. Therefore, the maximum amount the company should be willing to pay the outside supplier is:

$27.78 - $7.20 / 15,000 units = $27.78 - $0.48 = $27.30

However, the question asks for the maximum amount the company should be willing to pay per unit, not the total amount. Therefore, we divide the relevant cost by the number of units produced each year:

$27.30 / 60,000 units = $0.455 per unit

Rounding up to the nearest cent, the maximum amount the company should be willing to pay an outside supplier per unit is $0.46. The only answer choice that is within this range is (B) $42.30.

Ahsan Company Makes 60,000 Units Per Year of a Part