Ahrends Company makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:Direct materials.$\quad$$\quad$£17.80
Direct labour.$\quad$$\quad$19.00
Variable manufacturing overhead.$\quad$$\quad$1.00
Fixed manutacturing ov erhead.$\quad$$\quad$17.10
Unit product cost.$\quad$$\quad$£54.90
An outside supplier has offered to sell the company all of these parts it needs for £48.50 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 £273,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, £8.20 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 70,000 units required each year?

A)£50.60
B)£3.90
C)£58.80
D)£54.90

Question

Ahrends Company makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:Direct materials.$\quad$$\quad$£17.80
Direct labour.$\quad$$\quad$19.00
Variable manufacturing overhead.$\quad$$\quad$1.00
Fixed manutacturing ov erhead.$\quad$$\quad$17.10
Unit product cost.$\quad$$\quad$£54.90
An outside supplier has offered to sell the company all of these parts it needs for £48.50 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 £273,000 per year.
If the part were purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However, £8.20 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 70,000 units required each year?

A)£50.60
B)£3.90
C)£58.80
D)£54.90

Quizplus · Accepted Answer

The maximum amount the company should be willing to pay per unit is calculated by considering the savings and costs associated with purchasing the part externally. The current cost to produce the part internally is £54.90, which includes direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead. By purchasing externally, the company saves on direct materials, direct labor, and variable manufacturing overhead but still incurs £8.20 of the fixed manufacturing overhead. Additionally, the opportunity to generate an additional contribution margin of £273,000 by using the facilities for another product must be considered. The calculation for the maximum price per unit to pay the supplier involves determining the cost savings and the opportunity cost of not producing the part internally.

Ahrends Company Makes 70,000 Units Per Year of a Part \quad

Ahrends Company Makes 70,000 Units Per Year of a Part $\quad$