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4 July, 18:41

Olive Corp. currently makes 20,000 subcomponents a year in one of its factories. The unit costs to produce are: Per unit Direct materials $ 12 Direct labor 8 Variable manufacturing overhead 12 Fixed manufacturing overhead8 Total unit cost #40 An outside supplier has offered to provide Olive Corp. with the 20,000 subcomponents at a $36 $36 per unit price. Fixed overhead is not avoidable. What is the maximum price Olive Corp. should pay the outside supplier?

a. $32

b. $36

c. $40

d. $44

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Answers (1)
  1. 4 July, 22:10
    0
    a. $ 32

    Explanation:

    Computation of purchase price

    The company can make the components with a variable cost which is as follows:

    Direct Materials per unit $ 12

    Direct Labour per unit $ 8

    Variable Manufacturing overhead per unit $ 12

    Total Variable Cost per unit $ 32

    Since the fixed manufacturing overhead shall not be reduced, the maximum price that can be paid is the internal variable costs.

    So the maximum purchase price is $ 32
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