Final answer:
The maximum price W.T. Ginsburg Engine Company should be willing to pay an outside supplier for part ACT31107 is $98.75 per unit, which is the in-house production cost per unit after accounting for the fixed overhead reduction.
Step-by-step explanation:
The W.T. Ginsburg Engine Company needs to calculate the maximum price it should be willing to pay an outside supplier for part ACT31107. To determine this, we must consider the total costs of production versus the cost of purchasing the part, while also taking potential savings from fixed costs into consideration.
The current monthly production costs for 1,010 units are as follows:
- Direct materials: $41,000
- Direct labor: $7,500
- Variable overhead costs: $34,500
- Fixed overhead costs: $18,000
- Total costs: $101,000
Since 7% of the fixed overhead costs would no longer be incurred if the part is purchased from an outside supplier, we can calculate the savings:
Fixed cost savings: 7% of $18,000 = $1,260
New fixed overhead costs: $18,000 - $1,260 = $16,740
External purchase cost for 1,010 units at $94.75 each would be $95,697.50. However, by reducing the monthly fixed overhead costs by $1,260, the company saves that amount if they decide to outsource. Therefore, the total production cost, after removing the part of fixed overhead that can be saved, is $99,740 ($101,000 - $1,260).
The maximum price W.T. Ginsburg Engine Company should be willing to pay per unit to the outside supplier is the cost per unit if they were to continue producing it in-house, minus the savings implied by reduced fixed overhead when not producing the part:
Total cost to make in-house after the fixed overhead reduction = $99,740
Cost per unit = $99,740 / 1,010 units = $98.75