Question

Marigold Corp. produces 60000 CDs on which to record music. The CDs have the following costs:

Direct Materials	$15500
Direct Labor	18000
Variable Overhead	2000
Fixed Overhead	7000

None of Marigold Corp.’s fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $4000 if the CDs were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the CDs, what is the maximum external price that Marigold Corp. would be willing to accept to acquire the 60000 units externally?

-$39500

-$46500

-$38500

-$42500

Answer 1

Answer: OPTION A($39500).

In the given case,

Variable costs such as direct materials, direct labour, variable overheads change with the change in decision and are relavant for the decision whether or not to buy from outside and thereby included in calculating the maximum external price.

Where as fixed overhead is not relavant because it is given that none of fixed overhead costs can be reduced means it does not change with the change in decision and thereby not included in calculating the maximum external price.

Maximum external price for purchasing the CDs from outside=

=Variable costs for producing the product internally + increase in contribution margin from manufacturing of another product.

=$15500 + $18000 + $2000 + $4000

=$39500.

Thankyou.....