Question

Sheridan Company produces 5000 units of part A12E. The following costs were incurred for that level of production:

Direct materials	$ 55000
Direct labor	160000
Variable overhead	75000
Fixed overhead	175000

If Sheridan buys the part from an outside supplier, $40000 of the fixed overhead is avoidable.

If the outside supplier offers a unit price of $68, net income will increase (decrease) by

$(10000).

$125000.

$85000.

$(50000).

Bonita Industries has the following costs when producing 100000 units:

Variable costs	$600000
Fixed costs	900000

An outside supplier is interested in producing the item for Bonita. If the item is produced outside, Bonita could use the released production facilities to make another item that would generate $230000 of net income. At what unit price would Bonita accept the outside supplier’s offer if Bonita wanted to increase net income by $200000?

$5.70

$8.30

$6.30

$10.30

Answer 1

Total cos to Produce = 600,000+900,000 = $ 1500,000

Bonita want to increase the operating income by 230,000

Total Relevant cost for the Purchase should = 1500,000-200,000 = $1,300,000

Total Relevant cost = Purchased cost +Fixed cost - Net income Generated

=$1,300,000 = Purchase Cost +900,000-230,000

$1,300,000- Purchasing Price = 670,000

purchasing Price = 1300,000-670,000

$ 630,000

Purchasing price per Unit =630,000 /100,000 = $ 6.30

Answer : $ 6.30