Homework Answers
Requirement a
Given, in the question there is no alternative use for manufacturing capacity. So Fixed costs will still be incurred, with no benefit. Variable cost will not incurred.
Fixed cost = $23 x 20,800 unit = $478,400
Cost of purchase from outside = $122 x 20,800 unit = $2,537,600
New total cost = $478,400 + $2,537,600 = $3,016,000
Old total cost = $132 x 20,800 units = $2,745,600
So profit will reduce by = $3,016,000 - $2,745,600 = $270,400
Requirement b
Given, in the question there is no alternative use for manufacturing capacity. So Fixed costs will still be incurred, with no benefit. Variable cost will not incurred. So they will be willing to pay maximum of variable cost incurred per unit.
Maximum price = $132 - $23 = $109 per unit
Requirement c
New Fixed cost = ($23 x 20,800 unit) - $322,000 = $156,400
Cost of purchase from outside = $122 x 20,800 unit = $2,537,600
New total cost = $156,400 + $2,537,600 = $2,694,000
Old total cost = $132 x 20,800 units = $2,745,600
So profit will increase by = $2,745,600 - $2,694,000 = $51,600
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