Question

BC Company produces and sells a single product called Kleen. Annual production capacity is 100,000 machine hours. It takes one machine hour to produce a unit of Kleen. Annual demand for Kleen is expected to remain at 80,000 units. The selling price is expected to remain at $10 per unit.

Cost data for producing and selling 80,000 units of Kleen are as follows:

Variable costs per unit:

Direct materials $1.50

Direct labor $2.50

Variable manufacturing overhead $0.80

Variable selling expense$2.00

Fixed costs per unit:

Fixed manufacturing overhead $1.25

Fixed selling and administration $0.65

Total cost per unit:$8.70

1) MNO Company offers to make and ship 25,000 units of Kleen directly to ABC’s customers. If ABC accepts this offer, it will continue to produce and ship the remaining 55,000 units. ABC’s fixed manufacturing overhead will drop to $90,000. Its fixed selling and administration costs will remain unchanged. Variable selling costs will drop to $0.80 per unit for the 25,000 units produced and shipped by MNO. What is the maximum amount per unit that ABC should pay MNO for producing and shipping the 25,000 units?

Answer 1