Question

Grand Limited currently produces a component of a product with the following per unit production costs: Direct materials $19.00 Direct labour 32.72 Overhead 19.66 Total production costs $71.38 Grand Ltd, currently manufactures these components in-house, averaging production of 27517 units each year. A supplier has approach the company offering to supply 27517 units each year at a cost of $54.09 each. 60% of the overhead is fixed and if Grand Ltd, purchases the components, then 1/3 of the fixed overhead costs would be avoidable. What is the maximum price that Grand should pay per unit for the component? Select one: a. $59.58 b. $63.52 c. 558.27 d. $71.38

Please show work. thank you

Answer 1

Overhead per unit = $19.66

Fixed overhead per unit = overhead per unit x 60%

= 19.66 x 60%

= $11.80

Avoidable fixed overhead per unit = 11.80 x 1/3

= $3.93

Unavoidable fixed overhead per unit = Fixed overhead per unit - Avoidable fixed overhead per unit

= 11.80-3.93

= $7.87

Variable overhead per unit = Overhead per unit - Fixed overhead per unit

= 19.66-11.80

= $7.86

Calculation of maximum price that Grand should pay per unit

Direct materials	19
Direct labor	32.72
Variable overhead	7.87
Avoidable fixed overhead	3.93
Total price	$63.52

Hence, Maximum price that Grand should pay per unit = $63.52

Correct option is b.

Unavoidable fixed overhead is not relevant in deciding maximum price to be paid since it will be incurred whether the component is made or bought from the outside suppliers.

Kindly comment if you need further assistance. Thanks‼!