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?

Question

Quizplus · Accepted Answer

If Bremmer accepts Daisy's offer, they would save $8 per unit on fixed overhead costs and $30,000 in lease payments.

The total savings on fixed overhead costs would be:

$8 per unit x 5,000 units = $40,000

So the total cost of producing 5,000 units with Daisy would be:

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

And the total cost savings would be:

$200,000 - $40,000 - $30,000 - $175,000 = $-45,000

This means that Bremmer would actually lose $45,000 by accepting Daisy's offer.

To be indifferent between producing ZQ98 in-house or outsourcing to Daisy, the cost would need to be the same.

Let X be the price at which Bremmer would be indifferent between producing in-house and outsourcing to Daisy.

Then, we can set up the following equation:

$200,000 - $8 per unit x 5,000 units - $30,000 = X per unit x 5,000 units

Simplifying this equation, we get:

$200,000 - $40,000 - $30,000 = $5,000X

$130,000 = $5,000X

X = $130,000 / $5,000

X = $26

Therefore, Bremmer would be indifferent between producing in-house and outsourcing to Daisy if Daisy's offer was $26 per unit.

Since Daisy's actual offer is $35 per unit, Bremmer should produce ZQ98 in-house to save costs.

However, if Daisy was willing to reduce their offer to $26 or below, it would be beneficial for Bremmer to outsource to them.

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