Question

Ahrends Corporation makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct materials	$	21.80
Direct labor		26.90
Variable manufacturing overhead		7.50
Fixed manufacturing overhead		37.30
Unit product cost	$	93.50

An outside supplier has offered to sell the company all of these parts it needs for $79.80 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $200,000 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $32.40 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required each year? (Round your intermediate calculations to 2 decimal places.)

Garrison 16e Rechecks 2017-09-13

Multiple Choice

• $93.50 per unit

• $66.10 per unit

• $98.50 per unit

• $5.00 per unit

Bruce Corporation makes four products in a single facility. These products have the following unit product costs:

	Products
	A		B		C		D
Direct materials	$	13.10	$	9.00	$	9.80	$	9.40
Direct labor		18.20		26.20		32.40		39.20
Variable manufacturing overhead		3.10		1.50		1.40		2.00
Fixed manufacturing overhead		25.30		33.60		25.40		36.00
Unit product cost	$	59.70	$	70.30	$	69.00	$	86.60

Additional data concerning these products are listed below.

	Products
	A		B		C		D
Grinding minutes per unit		2.60		3.20		3.10		2.20
Selling price per unit	$	74.90	$	92.30	$	86.20	$	103.00
Variable selling cost per unit	$	1.00	$	0.00	$	2.10	$	0.40
Monthly demand in units		2,800		2,800		1,800		2,000

The grinding machines are potentially the constraint in the production facility. A total of 52,500 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

How many minutes of grinding machine time would be required to satisfy demand for all four products?

Multiple Choice

• 18,940

• 5,680

• 52,500

• 26,220

Answer 1

Maximum price = Costs avoided + Additional contribution margin earned

= (21.80+26.90+7.50+4.9)+200,000/40,000

= $66.10 per unit

Minutes of grinding machine required = 2800*2.6 + 2800*3.2 + 1800*3.10 + 2000*2.20

= 26,220 minutes