Question

Sheffield Corp. can produce 100 units of a necessary component part with the following costs: Direct Materials $15000 Direct Labor 6000 Variable Overhead 16000 Fixed Overhead 8000 If Sheffield Corp. purchases the component externally, $2000 of the fixed costs can be avoided. What is the maximum amount Sheffield is willing to pay to purchase the 100 units?

Answer 1

Answer:

$45,000

Explanation:

Provided information,

Actual cost of production

Direct material = $15,000

Direct Labor = $6,000

Variable Overhead = $16,000

Total variable cost = $37,000

Cost per unit = $37,000/100 = $370 per unit

Also total fixed cost = $8,000

Total cost = $45,000

Cost per unit = $450

In case of purchasing units cost avoidable = Variable costs + Fixed cost up to $2,000

Therefore, Sheffield will be willing to pay $37,000 + $8,000 that is the actual cost in case of manufacturing not more than that. = $45,000