Lincoln Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 5,000 units, are as follows:
$$\begin{array} { | l | r | r | }
\hline \text { Direct materials } & \$ 3 & \
\hline \text { Direct labor } & 5 & \
\hline \text { Variable manufacturing overhead } & 4 & \
\hline \text { Fixed manufacturing overhead } & 2 & \
\hline \text { Total cost } & \$ 14 & \
\hline
\end{array}$$ The fixed overhead costs are unavoidable.
Assuming no other use for its facilities, what is the highest price per unit that Lincoln Company should be willing to pay for the part?

Question

Lincoln Company produces a part that is used in the manufacture of one of its products. The unit manufacturing costs of this part, assuming a production level of 5,000 units, are as follows:
$$\begin{array} { | l | r | r | } 
\hline \text { Direct materials } & \$ 3 & \
\hline \text { Direct labor } & 5 & \
\hline \text { Variable manufacturing overhead } & 4 & \
\hline \text { Fixed manufacturing overhead } & 2 & \
\hline \text { Total cost } & \$ 14 & \
\hline
\end{array}$$ The fixed overhead costs are unavoidable.
Assuming no other use for its facilities, what is the highest price per unit that Lincoln Company should be willing to pay for the part?

Quizplus · Accepted Answer

The highest price Lincoln Company should be willing to pay is the total variable cost per unit, which is the sum of direct materials, direct labor, and variable manufacturing overhead ($3 + $5 + $4 = $12). Fixed costs are unavoidable and irrelevant to the decision.

Lincoln Company Produces a Part That Is Used in the Manufacture