Question

ABC Company makes 40,000 units per year of a part it uses in the

products it manufactures. The per unit product cost of this part

is shown below:

direct materials .............. $15.30

direct labor .................. 24.70

variable overhead ............. 2.10

fixed overhead ................ 27.40

total ......................... $69.50

An outside supplier has offered to sell ABC Company 40,000 units

of this part a year for $66.10 per unit. If ABC Company accepts

this offer, the facilities now being used to make this part could

be used to make more units of a product that is in high demand.

The additional contribution margin that could be earned on this

other product would be $100,000 per year.

If ABC Company accepts the outside supplier's offer, $21.90 of the

fixed overhead cost being applied to the part would be eliminated.

The remaining amount would continue to be incurred and would be

allocated to the company's remaining products.

Calculate the selling price per unit charged by the outside

supplier that would make ABC Company economically indifferent

between making and buying the part.

Answer 1

Solution: According to the Question, we need to calculate the selling price per unit charged by the outside supplier :

1. Calculation of relevant manufacturing cost:

Particulars	Amount ($)
Direct Material	$15.30
Direct Labor	$24.70
Variable Manufacturing Overhead	$2.10
Fixed Manufacturing Overhead ($27.40-$21.90)	$5.50
Relevant manufacturing cost-	$47.60

2.Calculation of selling price per unit charged by the outside supplier:

Total manufacturing cost savings (40,000 units*$47.60)	$1,904,000
Add: Additional Contribution margin-	$100,000
Total profit- (a)	$2,004,000
Number of units- (b)	40,000 units
Selling price per unit (a/b)	$50.10