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    Managerial accounting: Make or Buy

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    A company produces 1,000 units of a component per month. The total manufacturing costs of the component are as follows:

    Direct materials $10,000
    Direct labor 5,000
    Variable overhead 5,000
    Fixed overhead 30,000
    Total manufacturing cost $50,000

    An outside supplier has offered to supply the component at $30 per unit. It is estimated that 20% of the fixed overhead assigned to the component will no longer be incurred if the company purchases it from the outside supplier. What is the maximum price that the company should be willing to pay the outside supplier?

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    Solution Preview

    Please see the response to your posting as below:

    Unavoidable fixed cost= $30000*(100%-20%) =$30000*80% =24000

    Unavoidable fixed ...

    Solution Summary

    The solution shows the calculations of the maximum price that the company will be willing to pay the outside supplier.