Meacham Company has traditionally made a subcomponent of its major product. Annual production of 20,000 subcomponents results in the following costs: Meacham has received an offer from an outside supplier who is willing to provide 20,000 units of this subcomponent each year at a price of $28 per subcomponent. Meacham knows that the facilities now being used to make the subcomponent would be rented to another company for $75,000 per year if the subcomponent were purchased from the outside supplier. Otherwise, the fixed overhead would be unaffected.
-Suppose the price for the subcomponent has not been set.At what price per unit charged by the outside supplier would Meacham be economically indifferent between making the subcomponent or buying it from the outside?
A)$30.25
B)$29.25
C)$26.50
D)$31.50

Question

Meacham Company has traditionally made a subcomponent of its major product. Annual production of 20,000 subcomponents results in the following costs:  Meacham has received an offer from an outside supplier who is willing to provide 20,000 units of this subcomponent each year at a price of $28 per subcomponent. Meacham knows that the facilities now being used to make the subcomponent would be rented to another company for $75,000 per year if the subcomponent were purchased from the outside supplier. Otherwise, the fixed overhead would be unaffected.
-Suppose the price for the subcomponent has not been set.At what price per unit charged by the outside supplier would Meacham be economically indifferent between making the subcomponent or buying it from the outside?
A)$30.25 
B)$29.25 
C)$26.50 
D)$31.50

Quizplus · Accepted Answer

Explanation:The correct answer is A: $30.25. This is the price at which Meacham would be indifferent between making the subcomponent or buying it from the outside supplier. At this price, the cost of making the subcomponent would be equal to the cost of buying it from the outside supplier.

Meacham Company Has Traditionally Made a Subcomponent of Its Major