Question

Waterway Industries produces 1000 units of a necessary component with the following costs:

Direct Materials	$36000
Direct Labor	17000
Variable Overhead	11000
Fixed Overhead	10000

Waterway Industries could avoid $6000 in fixed overhead costs if it acquires the components externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Waterway Industries would accept to acquire the 1000 units externally?

a. $63000

b. $64000

c. $68000

d. $70000

Answer 1

Cost to produce = $36,000 + $17,000 + $11,000 + $10,000 = $74,000

If the product is purchased, $6,000 of fixed overhead can be avoided and remaining $4,000 cannot be avoided.

$4,000 will be incurred if the products are purchased. Remaining $70,000 is the maximum amount that should be spent on purchase.

So the maximum cost to purchase should not exceed $70,000

Option d.