Foto Company makes 80000 units per year of a part it uses in the products it man

Question

Foto Company makes 80000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows $13 Direct labor Variable manufacturing overnead.. Fxed manufacturing overhead. Unit produsgt co 59 550 If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $2 of the ftxed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fxed manufacturing overhead cost would be applied to the company's remaining products What is the most (per unit) that Foto Company should be willing to pay an outsider to buy the part?

Explanation / Answer

The maximum amount per unit that the Company will be willing to pay to an outside supplier would be the avoidable costs of producing the product inhouse. The following are the avoidable costs which will be reduced to 0 if they are purchased from outside:

Thus, company could pay atmost $48 per unit.

Particulars Per unit cost Direct Materials 23 Direct Labour 13 Variable manufacturing Overhead 9 Fixed manufacturing Overhead (5-2) 3 Avoidable unit cost 48

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