Cotton Corp currently makes 10,000 subcomponents a year in one of its factories.The unit costs to produce are: An outside supplier has offered to provide Cotton Corp with the 10,000 subcomponents at a $84.50 per unit price.Fixed overhead is not avoidable.What is the maximum price Cotton Corp should pay the outside supplier?

A)$65.00
B)$84.50
C)$91.00
D)$58.50

Question

Cotton Corp currently makes 10,000 subcomponents a year in one of its factories.The unit costs to produce are: An outside supplier has offered to provide Cotton Corp with the 10,000 subcomponents at a $84.50 per unit price.Fixed overhead is not avoidable.What is the maximum price Cotton Corp should pay the outside supplier?
Cotton Corp currently makes 10,000 subcomponents a year in one of its factories.The unit costs to produce are: An outside supplier has offered to provide Cotton Corp with the 10,000 subcomponents at a $84.50 per unit price.Fixed overhead is not avoidable.What is the maximum price Cotton Corp should pay the outside supplier? A) $65.00 B) $84.50 C) $91.00 D) $58.50

A)$65.00 
B)$84.50 
C)$91.00 
D)$58.50

Quizplus · Accepted Answer

To determine if it is financially beneficial for Cotton Corp to buy from the outside supplier, we need to compare the total cost of making the subcomponents in-house versus buying them from the outside supplier.

In-house production cost:
Variable costs = 10,000 units x $50.00 per unit = $500,000
Fixed costs = $200,000
Total cost = variable costs + fixed costs = $700,000
Unit cost = total cost / 10,000 units = $70.00 per unit

Buying from outside supplier cost:
10,000 units x $84.50 per unit = $845,000

Comparing the two costs, it is financially beneficial for Cotton Corp to buy from the outside supplier as it will cost them $145,000 less than producing in-house.

However, the maximum price Cotton Corp should pay the outside supplier cannot exceed the current in-house unit cost of $70.00 per unit, because if Cotton Corp pays more than $70.00 per unit, then it will be more expensive to buy from the outside supplier than producing in-house.

Therefore, the maximum price Cotton Corp should pay the outside supplier is $70.00 per unit minus the variable costs of $50.00 per unit, which equals $20.00 per unit. Subtracting $20.00 per unit from the current outside supplier price of $84.50 per unit gives us the maximum price Cotton Corp should pay the outside supplier, which is $64.50 per unit ($84.50 - $20.00).

Rounding up to the nearest increment of $0.50 gives us a final answer of $65.00 per unit.

Cotton Corp Currently Makes 10,000 Subcomponents a Year in One