Homework Answers
Answer:
Given that fixed costs are unavoidable.
If the item is outsourced (given to supplier):
Savings and earnings to the company will be:
Saving in Variable cost = $480,000
Net Income generated from another item produced from released capacity = $110,000
Total benefits (savings and earnings) = $480,000 + $110,000 =$590,000
Hence the price per unit that the company can accept has to be lower than = Total benefits / Number of units = $590,000 / 100,000 = $5.90 per unit.
At price of $5.90 company will be indifferent. From the options only price that is lower than $5.90 is $5.70
At price of $5.70, company will have net benefit = Total benefit - cost of units from supplier = $590,000 - $5.70 * 100,000 = $20,000
As such option A is most appropriate option.
Other options B and C are incorrect. Option D is not the best option since at price of $5.90 company will be indifferent.
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