Flamingo Music produces 60,000 CDs on which to record music. The CDs have the following costs: Direct Materials $11,000 Direct Labor 15,000 Variable Overhead 3,000 Fixed Overhead 7,000 Flamingo could avoid $6,000 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major consideration and the company would prefer to buy the 60,000 units externally, what is the maximum external price that Flamingo would expect to pay for the units?

Question

Business

Kenyon Blackwell

2 October, 10:32

Flamingo Music produces 60,000 CDs on which to record music. The CDs have the following costs: Direct Materials $11,000 Direct Labor 15,000 Variable Overhead 3,000 Fixed Overhead 7,000 Flamingo could avoid $6,000 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major consideration and the company would prefer to buy the 60,000 units externally, what is the maximum external price that Flamingo would expect to pay for the units?

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Mohammad Schmitt · Answer 1

The maximum external price that Flamingo would expect to pay for the units is $35,000

Explanation:

The computation of the maximum external price is shown below:

= Direct material cost + direct labor cost + variable overhead cost + fixed overhead cost

= $11,000 + $15,000 + $3,000 + $6,000

= $35,000

All costs would remain the same but we considered the fixed overhead cost for $6,000 as it is the externally fixed cost not the $7,000 fixed overhead cost