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

Question

Jamie Kirk

Business

23 February, 22:11

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

+2

Answers (1)

Know the Answer?

Neil Wilkins · Answer 1

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