Down Hill All the Way, Inc. produces bicycles. In its current manufacturing environment, Down Hill makes all of the wheels used in production. Down Hill’s annual costs related to the production of 100,000 wheels are as follows: Direct Materials $30,000 Direct Labor $50,000 Variable Overhead $20,000 Fixed Overhead $70,000 An outside supplier has offered to sell Down Hill similar wheels for $1.25 per wheel. If the wheels are purchased from the outside supplier, $15,000 of annual fixed overhead could be avoided and the new facilities now being used could be rented to another company for $45,000 per year. What is the highest price that Down Hill could pay the outside supplier for the wheel and be economically indifferent between making or buying the wheels?

Down Hill’s annual costs related to the production of 100,000 wheels are as follows: Direct Materials $30,000 Direct Labor $50,000 Variable Overhead $20,000 Fixed Overhead $70,000 An outside supplier has offered to sell Down Hill similar wheels for $1.25 per wheel. If the wheels are purchased from the outside supplier, $15,000 of annual fixed overhead could be avoided and the new facilities now being used could be rented to another company for $45,000 per year.

Make in house:

Variable costs= 100,000

Avoidable overhead= 15,000

Rent lost= 45,000

Total= 160,000

Unitary cost= 160,000/100,000= $1.6

The maximum price is $1.6