Question

premium engine company (pec) uses part xg72 in several of its engine models. manufacturing costs for 1,000 units are as follows: direct materials of $48,000, direct labor of $12,000, variable overhead costs are $34,000 and fixed overhead costs of $18,000. total manufacturing costs are thus $110,000. if pec purchases xg72 from an outside supplier, at a cost of $92 per unit, 10% of the fixed overhead costs will no longer be incurred. if pec accepts the offer from the supplier, the maximum price per unit of xg72 that pec should be willing to pay is

Answer 1

The maximum price per unit that PEC should be willing to pay for part XG72 is $108.20.

Step-by-step explanation:

To determine the maximum price per unit that Premium Engine Company (PEC) should be willing to pay for part XG72, we need to consider the cost savings from purchasing it from an outside supplier.

If PEC purchases XG72 from the supplier, they can save 10% of the fixed overhead costs, which amounts to $1,800 ($18,000 x 10%).

Therefore, the maximum price per unit that PEC should be willing to pay is the total manufacturing cost minus the cost savings from purchasing it from the supplier, divided by the number of units (1,000).

Maximum price per unit = (Total manufacturing cost - Cost savings) / Number of units = ($110,000 - $1,800) / 1,000 = $108.20