Question

Question 15

  using the information below.

Schmidt Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 10,000 units of this part are as follows: Direct materials $45,000 Direct labour 65,000 Variable factory overhead 30,000 Fixed factory overhead 70,000 Total costs $210,000 Of the fixed factory overhead costs, $30,000 is avoidable. Assuming accepting the offer creates excess facility capacity that can be used to produce 2,000 units of another product that has a unit selling price of $24, variable costs of $12, and fixed cost allocation of $3.

What is the highest price that Schmidt should be willing to pay Phil Company for 10,000 units of the part?

Question 15 options:

1-$146,000

2-$134,000

3-$140,000

4-$152,000

5-$164,000

Answer 1

Total fixed cost is $70,000. $30,000 is avoidable fixed cost if the units are purchased. Remaining $40,000 will be incurred whether the product is made or purchased. $30,000 should be considered as a relevant cost for making the units.

Relevant cost to make = $45,000 + $65,000 + $30,000 + $30,000 (Fixed overhead) = $170,000

Contribution margin from another product = ($24 - $12 - $3) X 2,000 = $18,000

Maximum price to pay = $170,000 - $18,000

= $152,000

4th option.