An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

-What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required each year?
A)$6.60 per unit
B)$44.60 per unit
C)$59.90 per unit
D)$66.50 per unit

Question

An outside supplier has offered to sell the company all of these parts it needs for $46.20 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $264,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

-What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required each year?
A)$6.60 per unit
B)$44.60 per unit
C)$59.90 per unit
D)$66.50 per unit

Quizplus · Accepted Answer

To determine the maximum amount the company should be willing to pay an outside supplier per unit for the part, we need to calculate the incremental cost of producing the part in-house versus outsourcing it.

If the company produces the part in-house, the incremental cost per unit is $40 ÷ 40,000 = $1. 
If the company outsources the part, the incremental cost per unit is $5.60 - $1 = $4.60.

Therefore, the company should be willing to pay the outside supplier up to the incremental cost of $4.60 per unit. Adding this to the current cost per unit of $40, we get a maximum amount of $44.60 per unit.

Thus, the best choice is B.

An Outside Supplier Has Offered to Sell the Company All