Flamingo Music produces 60000 CDs on which to record music. The CDs have the following costs: $$\begin{array} { l r }
\text { Direct Materials } & \$ 11,000 \
\text { Direct Labor } & 15,000 \
\text { Variable Overhead } & 3,000 \
\text { Fixed Overhead } & 7,000
\end{array}$$ Flamingo could avoid $6000 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major consideration and the company would prefer to buy the 60000 units externally what is the maximum external price that Flamingo would expect to pay for the units?
A) $30000
B) $29000
C) $35000
D) $36000

Question

Flamingo Music produces 60000 CDs on which to record music. The CDs have the following costs: $$\begin{array} { l r } 
\text { Direct Materials } & \$ 11,000 \
\text { Direct Labor } & 15,000 \
\text { Variable Overhead } & 3,000 \
\text { Fixed Overhead } & 7,000
\end{array}$$ Flamingo could avoid $6000 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major consideration and the company would prefer to buy the 60000 units externally what is the maximum external price that Flamingo would expect to pay for the units?
A) $30000
B) $29000
C) $35000
D) $36000

Quizplus · Accepted Answer

The total cost of producing the CDs internally is $36,000 ($11,000 + $15,000 + $3,000 + $7,000). If $6,000 of fixed overhead can be avoided by buying externally, the relevant cost of producing internally is $30,000 ($36,000 - $6,000). Therefore, the maximum external price Flamingo would pay is $35,000 ($30,000 + $6,000 saved fixed overhead).

Flamingo Music Produces 60000 CDs on Which to Record Music