Question

Question 9 Crane Music produces 59000 blank CDs on which to record music. The CDs have the following costs: Direct Materials Direct Labour Variable Overhead Fixed Overhead $10000 14000 2500 6500 Crane could avoid $3500 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major consideration and the company would prefer to buy the 59000 units externally, what is the maximum external price that Crane would expect to pay for the units? $29500 O $26500 $33000 $30000

Answer 1

Correct answer---------$30,000

Working

The external price acceptable will be equal to avoidable cost of the company that is incurred in making the product.

	Cost to Make
Direct material	$       10,000.00
Direct labor	$       14,000.00
Variable Overhead	$         2,500.00
Avoidable Fixed overheads	$         3,500.00
Total Cost	$       30,000.00

Total fixed overhead will not be included only the avoidable are relevant cost of making.