Question

Intel, leading manufacturer, manufactures 5,000 units of processor chip, B-17, each year for use on its production line. At this level of activity, the cost per unit of processor chip is:

Direct materials $        354

Direct labor 20

Variable manufacturing overhead 8

Fixed manufacturing overhead   80

Total manufacturing cost per unit $ 462

An outside supplier has offered to sell all units of processor chip the company requires. If the company decided to discontinue making processor chip, 35% of the above fixed manufacturing overhead costs could be avoided.

The company could use the facilities presently devoted to the production of processor chip to increase production of another product by 2,500 units, which would yield an additional contribution margin of $80,000 annually.

Q) What is the maximum price the company would be willing to pay the outside supplier for processor chip?

A) $  per unit

Answer 1

Relevant Cost of Manufacturing Chips in house:
	Amt in $
Direct materials [5000*354]	1770000
Direct labor [5000*20]	100000
Variable manufacturing overhead [5000*8]	40000
Fixed manufacturing overhead [5000*80*35%]	140000
Cost of Manuafacturing	2050000
Additional contribution margin of Other Product	-80000
Net Relevant Cost of Manufacturing 5000 Chips	1970000
Cost of Manuafacturing per Chip [1970000/5000]	394.00

Thus, maximum price the company would be willing to pay the outside supplier for processor chip is $ 394 per chip.