Lift Dentistry Services operates in a large metropolitan area. Lift has its own

Question

 Lift Dentistry Services operates in a large metropolitan area. Lift has its own dental laboratory used to produce porcelain and gold crowns. The per unit variable costs to produce these crowns are:     porcelain  .......  $81 per crown    gold  ............  $115 per crown  Fixed overhead includes the following:                                     porcelain         gold    supervisor's salary             $15,000         $20,000    allocated general overhead      $ 6,000         $ 6,000  A local dental laboratory has offered to supply Lift all the crowns it needs. Its price is $100 per porcelain crown and $136 per gold crown; however, the offer is conditional on supplying both types of crowns (i.e., the local laboratory will not supply just one type of crown for the price indicated). If the offer is accepted, Lift could rent the space now being used to make the crowns to another company for $16,000 per year. Lift uses 1,800 porcelain crowns and 1,200 gold crown per year.  Assume the local laboratory will charge $100 per porcelain crown, but is willing to negotiate on the price of the gold crowns. Calculate the selling price per unit charged by the local laboratory for the gold crowns that would make Lift Dentistry Services economically indifferent between making the crowns themselves and purchasing the crowns from the local laboratory.

Explanation / Answer

Answer In this problem supervisor’s fixed salary and allocated general fixed overhead are not relevant to calculate indifferent price of gold crown. Only variable cost has taken in consideration for this purpose.

Indifferent point between in-house production of gold and porcelain crowns- Net in-house total production cost= net purchase cost of crowns form local laboratory

1800 crowns*$81 per crowns+ 1200 crowns*$115 per crowns=1800 crowns*$100+1200 crowns*Purchase price of gold crown- $16000 annual rent income

$145,800+$138,000=$180,000+ 1200*Purchase price of gold crown-$16000

$283800=$164,000+1200* purchase price of gold crown

$119,800=1200* purchase price of gold crown

Purchase price of gold crown=$11980/1200

=$99.83 or $100 approx.

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