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Minimum Acceptable Price Quotation

4. Evan Company manufactures and sells several products, one of which is called a slip differential. The company normally sells 30,000 units of the slip differential each month. At this activity level, unit costs are

Direct materials $4
Direct labor 3
Variable manufacturing overhead 4
Fixed manufacturing overhead 5
Variable selling 3
Fixed selling 1

An outside supplier has offered to produce the slip differentials for Evan Company, and to ship them directly to Evan Company's customers. This arrangement would permit Evan Company to reduce its variable selling expenses by one third (due to elimination of freight costs). The facilities now being used to produce the slip differentials would be idle and fixed manufacturing overhead would continue at 60 percent of its present level. The total fixed selling expenses of the company would be unaffected by this decision.

Required :

What is the maximum acceptable price quotation for the slip differentials from the outside supplier?

Solution Summary

This solution shows step-by-step calculations to determine the maximum acceptable price quotation using direct materials, direct labor, manufacturing overhead, variable and fixed selling price in both in-house production and outside suppliers.

$2.19