Foto Company makes 50,000 units per year of a part it uses in the products it ma

Question

 Foto Company makes 50,000 units per year of a part it uses in the products it manufactures. The cost per unit of this part is shown below:  direct materials .............. $13.00 direct labor ..................  10.10 variable overhead .............   6.50 allocated fixed overhead ......   8.60 total ......................... $38.20  An outside supplier has offered to sell Foto Company 50,000 of these parts for $31.60 per unit. 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 earned on this other product would be $120,000 per year.  Calculate the selling price per unit charged by the outside supplier that would make Foto economically indifferent between making and buying the part.

Explanation / Answer

Solution: Selling price per unit charged by the outside supplier that would make Foto economically indifferent between making and buying the part $32 per unit Working Notes: Cost charged by outside supplier would be economically indifferent to FOTO if it will be equal to total avoidable cost and opportunity cost for the facilities. total avoidable cost + opportunity cost = selling price per unit charged by outside suppliers x units sold Avoidable cost per unit = direct material + direct labor + variable OH =$13 + $10.10 + $6.50 =$29.60 opportunity cost = contribution margin from the facilities if buy from outside = $120,000 total avoidable cost + opportunity cost = selling price per unit charged by outside suppliers x units sold Avoidable cost per unit x units sold + opportunity cost = selling price per unit charged by outside suppliers x units sold $29.60 x 50,000 + $120,000 = selling price x 50,000 $1,480,000 + $120,000 = selling price x 50,000 1,600,000 = selling price x 50,000 Selling price per unit = $1,600,000/50,000 Selling price per unit = $32 Hence, $32 Selling price per unit charged by the outside supplier that would make Foto economically indifferent between making and buying the part Please feel free to ask if anything about above solution in comment section of the question.

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