Chloe Co. manufactures component Part AZY used in several of its engine models. ...
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Chloe Co. manufactures component Part AZY used in several of its engine models. Monthly production costs for 10,000 units are as follows:
Direct materials | $ 80,000 |
Direct labour | 20,000 |
Variable support costs | 50,000 |
Fixed support costs | 40,000 |
Total costs | $190,000 |
It is estimated that 20% of the fixed support costs assigned to component Part AZY will no longer be incurred if the company purchases the part from the outside supplier.
Chloe Co. has the option of purchasing the part from an outside supplier at $16 per unit.
Required:
(a) If Chloe Co. accepts the offer from the outside supplier, what is the total amount of avoidable costs (costs that will no longer be incurred) per month?
(b) If Chloe Co. purchases 10,000 units of Part AZY parts from the outside supplier per month, then what is the impact of its monthly operating income?
(c) What is the maximum price that Chloe Co. should be willing to pay the outside supplier for each unit of Part AZY?