Cotton Corp currently makes 10000 subcomponents a year in on

Cotton Corp. currently makes 10,000 subcomponents a year in one of its factories. The unit costs to produce are:

An outside supplier has offered to provide Cotton Corp. with the 10,000 subcomponents at a $84.50 per unit price. Fixed overhead is not avoidable. What is the maximum price Cotton Corp. should pay the outside supplier?

a) $91.00

b) $65.00

c) $84.50

d) $58.50

	Per unit
Direct materials		$	32.50
Direct labor			13.00
Variable manufacturing overhead			19.50
Fixed manufacturing overhead			26.00
Total unit cost		$	91.00

Solution

$ Direct materials 32.5 Direct labor 13 Variable manufacturing overhead 19.5 Maximum price that can be paid is 65 As fixed manufacturing overhead is unavoidable hence it would be incurred wheather subcomponent is made or purchased from outside hence not relevant Ans option B $65 If any doubt please comment. If satisfied you can rate