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Managerial accounting: Make or Buy

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?

Solution Preview

Hi,
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.

$2.19