Gopherit Corporation currently is manufacturing 40,000 units per year of a part

Question

Gopherit Corporation currently is manufacturing 40,000 units per year of a part used in its final product. The cost of producing this part is $50 per unit. The variable portion of this cost consists of direct materials of $25, direct labor of $15, and variable manufacturing overhead of $3. The company could earn $100,000 per year from the space now used to manufacture this part (What type of cost is this?). Assuming equal quality and availability, what is the maximum price per unit that Gopherit Corporation should pay to buy the part rather than make it? (The total fixed costs would not be affected by this decision.)

Explanation / Answer

Rent space cost known as oppourtunity cost.

maximum price per unit = Direct material + Direct labor + Manufacturing OH cost

                                            = 25 + 15 + 3    = 43

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