Question

Coronado Industries produces 1000 units of a necessary component with the following costs:

Direct Materials $20000
Direct Labor $9000
Variable Overhead $3000
Fixed Overhead $7000

None of Coronado Industries‘s fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $8000 if the components were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Coronado Industries would be willing to accept to acquire the 1000 units externally?

Answer 1

$40,000

Step-by-step explanation:

Current Cost = Direct Materials + Direct Labor + Variable Overhead + Fixed Overhead

= $20,000 + $9,000 + $3,000 + $7,000

= $39,000

Given,

Increase in profit contribution = $8,000 (If acquired from outside )

No fixed cost overhead Costs Can be reduced, so only profit margin will be reduced

New contribution margin = Increase in profit contribution (-) Fixed Cost

= $8,000 (-) $7,000

= $1,000

Maximum external price that Ruth Company would be willing to accept to acquire the 1,000 units externally

= Current Cost + New contribution margin

= $39,000 + $1,000

= $40,000

Maximum external price = $40,000