Question

Ahron Company makes 8,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials Variable manufacturing overhead Fixed manufacturing overhead Direct labor An outside supplier has offered to sell the company all of the units it needs. 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 $161,600 per year. If the part were purchased from the outside supplier, $7.50 of the fixed manufacturing overhead cost being applied to the part would be eliminated. 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 8,000 units required each year?

Answer 1

Maximum amount that the company should be willing to pay

= Additional contribution per unit + Avoidable fixed cost per unit

= $161,600/8,000 units + $7.50

= $27.70

Step-by-step explanation:

The maximum price that the company should be willing to pay is the aggregate of additional contribution earned on the other product and avoidable fixed cost if the parts were eliminated.