Question

Harmony is currently producing 100 component parts and incurring costs of $60,000 for direct materials, $12,500 for direct labor, $22,500 for variable overhead, and $15,000 for fixed overhead. If Harmony purchases these components from an external vendor, $10,000 of fixed costs would be eliminated.

What is the maximum amount that Harmony would be willing to pay the external vendor for these 100 component parts?

Answer 1

Harmony's maximum willingness to pay the external vendor for the 100 parts is $100,000.

Step-by-step explanation:

Harmony's maximum willingness to pay the external vendor for the 100 parts can be calculated by considering the costs incurred by producing the parts internally and the fixed costs that would be eliminated if purchased from the vendor.

The total costs for producing the parts internally are $60,000 for direct materials, $12,500 for direct labor, $22,500 for variable overhead, and $15,000 for fixed overhead, which equals $110,000.

If Harmony purchases the components from the external vendor, $10,000 of fixed costs would be eliminated, resulting in $100,000 in total costs.

The maximum amount Harmony would be willing to pay the external vendor can be calculated by subtracting the eliminated fixed costs from the total costs of producing the parts internally, which is $110,000 - $10,000 = $100,000.

Answer 2

he maximum that Harmony would be willing to pay the external vendor for these 100 component parts is $100,000

Step-by-step explanation:

Consider the Adjustment on the Cost of Manufacturing taking into account the cut in fixed cost that results from purchasing these components from an external vendor.

Cost of Manufacturing - Adjusted

direct materials $60,000

direct labor $12,500

variable overhead $22,500

fixed overhead ( $15,000 - $10,000) $5,000

Total $100,000

Thus the maximum that Harmony would be willing to pay the external vendor for these 100 component parts is $100,000