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

Question

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

Quizplus · Accepted Answer

To find the indifference price, calculate the relevant costs of producing in-house and compare them to the offer. The relevant costs include direct materials, direct labor, variable overhead, and the avoidable portion of fixed overhead. The avoidable fixed overhead is $8 per unit, and the lease savings are $30,000. The total relevant cost per unit is: ($20,000 + $55,000 + $45,000 + $40,000 - $30,000) / 5,000 = $38.

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