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Avoidable costs if purchased

Pratt Witney Company manufactures a part used in several of its engine models. Annual production costs for 1,500 units are as follows:

Direct materials $ 125,000
Direct labor 48,000
Variable support costs 75,000
Fixed support costs 65,000
Total costs $313,000

Pratt Witney Company has the option of purchasing the part from a General Electric at $167.50 per unit. It is estimated that 25% of the fixed support costs assigned to this part will no longer be incurred if the company purchases the part from GE.

2.1 If Pratt Witney Company accepts the offer from GE, the annual avoidable costs (costs that will no longer be incurred) total:

_________________________________

2.2 If Pratt Witney Company purchases 1,500 parts from GE per year, and then its operating income will:

Increase by _____________________ OR decrease by ___________________________

2.3 The maximum price that Pratt Witney Company should be willing to pay GE for each unit of this part is:

_________________________________

Solution Preview

Pratt Witney Company manufactures a part used in several of its engine models. Annual production costs for 1,500 units are as follows:

Direct materials $ 125,000
Direct labor 48,000
Variable support costs 75,000
Fixed support costs 65,000
Total costs $313,000
Pratt Witney Company has the option of purchasing the part from a General Electric at $167.50 per unit. It is ...

Solution Summary

The solution explains the effect on income if the parts are purchased instead of making.

$2.19