The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000. The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit.If Bremmer accepts the offer,$8 per unit of the fixed overhead would be saved.In addition,some of Bremmer's leased facilities could be vacated,reducing lease payments by $30,000 per year.At what price would Bremmer be indifferent to Daisy's offer?
A)$40.
B)$38.
C)$35.
D)$24.

Question

The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000.  The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit.If Bremmer accepts the offer,$8 per unit of the fixed overhead would be saved.In addition,some of Bremmer's leased facilities could be vacated,reducing lease payments by $30,000 per year.At what price would Bremmer be indifferent to Daisy's offer?
A)$40. 
B)$38. 
C)$35. 
D)$24.

Quizplus · Accepted Answer

If Bremmer accepts Daisy's offer, they would save $8 per unit of fixed overhead, which would result in a total cost of $192,000 ($200,000 - ($8 * 5,000)). Additionally, they would save $30,000 per year in lease payments, resulting in a total cost of $162,000 ($192,000 - $30,000).

To be indifferent between producing the units themselves or accepting Daisy's offer, Bremmer's total cost with Daisy's offer must be the same as their current cost of production. Therefore, we can set up the equation:

$35 per unit * 5,000 units = $175,000

$200,000 - ($8 * 5,000) - $30,000 = $162,000

The difference between these two costs is $13,000 ($175,000 - $162,000), which represents the most Bremmer would be willing to pay Daisy to produce the units. Since Bremmer's current cost per unit is $40 ($200,000/5,000 units), they would be willing to accept Daisy's offer if the price per unit is lower than $40.
 
Therefore, the answer is $38, which is the only option lower than Bremmer's current cost per unit of $40 and higher than the maximum price they would be willing to pay Daisy of $35 per unit.

The Bremmer Company Produces 5,000 Units of Item ZQ98 Annually