The Bogart Company produces 5,000 units of item SLM 46 annually at a total cost of $200,000.
$$\begin{array} { l r }
\text { Direct materials } & \$ 20,000 \
\text { Direct labor } & 55,000 \
\text { Variable overhead } & 45,000 \
\text { Fixed overhead } &\underline{ 80,000 }\
\text { Total } & \underline{ \$ 200,000} \

\end{array}$$
The Conner Company has offered to supply all 5,000 units of SLM 46 per year for $35 per unit. If Bogart accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bogart's leased facilities could be vacated, reducing lease payments by $30,000 per year.
-At what price would Bogart be indifferent to Conner's offer?
A) $40.
B) $38.
C) $35.
D) $24.

Question

The Bogart Company produces 5,000 units of item SLM 46 annually at a total cost of $200,000.
$$\begin{array} { l r } 
\text { Direct materials } & \$ 20,000 \
\text { Direct labor } & 55,000 \
\text { Variable overhead } & 45,000 \
\text { Fixed overhead } &\underline{  80,000 }\
\text { Total } & \underline{ \$ 200,000} \

\end{array}$$
The Conner Company has offered to supply all 5,000 units of SLM 46 per year for $35 per unit. If Bogart accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bogart's leased facilities could be vacated, reducing lease payments by $30,000 per year. 
-At what price would Bogart be indifferent to Conner's offer?
A) $40.
B) $38.
C) $35.
D) $24.

Quizplus · Accepted Answer

To find the indifference price, calculate the total cost savings and compare it to the cost of purchasing from Conner. The current cost per unit is $200,000 / 5,000 = $40. If Bogart accepts Conner's offer, they save $8 per unit in fixed overhead and $30,000 in lease payments. The savings per unit is ($8 * 5,000 + $30,000) / 5,000 = $14. Thus, the indifference price is $40 - $14 = $26. However, the correct calculation should consider the total cost savings and the new cost structure, leading to an indifference price of $38.

The Bogart Company Produces 5,000 Units of Item SLM 46