Question

The Fullerton Company has a maximum production capacity of 50,000 units per year. For that capacity level, fixed costs are $290,000 per year. Variable costs per unit are $80. In the coming year, the company has orders for 55,000 units at $105. The company wants to make a minimum overall operating income of $170,000 on these 55,000 units. Requirement What maximum unit purchase price would Fullerton Company be willing to pay to a subcontractor for the additional 5,000 units it cannot manufacture itself to earn an operating income of $170,000 ? Determine the maxiumum total cost to Fullerton Company of producing the 55,000 units while earning an operating income of $170,000. Total costs to produce 55,000 units is Identify the total cost to Fullerton Company to manufacture 50,000 units. Total costs to manufacture 50,000 units

Answer 1

The maximum unit purchase price Fullerton Company would be willing to pay to a subcontractor for the additional 5,000 units is $230,000. The maximum total cost to Fullerton Company of producing the 55,000 units while earning an operating income of $170,000 is $4,690,000. The total cost to Fullerton Company to manufacture 50,000 units is $4,290,000.

Step-by-step explanation:

To determine the maximum unit purchase price Fullerton Company would be willing to pay to a subcontractor for the additional 5,000 units, we need to calculate the total variable cost for these units. The variable cost per unit is $80, so the total variable cost for 5,000 units would be 5,000 x $80 = $400,000. In order to earn an operating income of $170,000, the maximum unit purchase price Fullerton Company would be willing to pay is the difference between the total variable cost and the desired operating income. Therefore, the maximum unit purchase price would be $400,000 - $170,000 = $230,000 for the additional 5,000 units.

To calculate the maximum total cost to Fullerton Company of producing the 55,000 units while earning an operating income of $170,000, we need to consider both fixed costs and variable costs for the 55,000 units. The fixed costs are $290,000 per year. The variable cost per unit is $80, so the variable costs for 55,000 units would be 55,000 x $80 = $4,400,000. The total cost is the sum of fixed costs and variable costs, which is $290,000 + $4,400,000 = $4,690,000.

To determine the total cost to Fullerton Company to manufacture 50,000 units, we can use the same calculation method as above. The fixed costs are $290,000 and the variable cost per unit is $80. Therefore, the variable costs for 50,000 units would be 50,000 x $80 = $4,000,000. The total cost is the sum of fixed costs and variable costs, which is $290,000 + $4,000,000 = $4,290,000.