Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part P40: Jackson Corporation can purchase the part from an outside supplier for $4.50 per unit. If they purchase from the outside supplier, 50% of the fixed costs would be avoided. If Jackson Corporation buys the part, what is the most Jackson Corporation can spend per unit so that operating income is equal to $98,000?
A)$3.77
B)$2.98
C)$2.19
D)$1.52

Question

Part P40 is a part used in the production of air conditioners at Jackson Corporation. The following costs and data relate to the production of Part P40:  Jackson Corporation can purchase the part from an outside supplier for $4.50 per unit. If they purchase from the outside supplier, 50% of the fixed costs would be avoided. If Jackson Corporation buys the part, what is the most Jackson Corporation can spend per unit so that operating income is equal to $98,000?
A)$3.77 
B)$2.98 
C)$2.19 
D)$1.52

Quizplus · Accepted Answer

Let's start by calculating the total cost of producing Part P40 in-house:

Total cost = Direct materials + Direct labor + Manufacturing Overheads
Total cost = $6.00 + $3.00 + $4.00
Total cost = $13.00

Now, let's calculate the contribution margin per unit:

Contribution margin = Sales price - Total cost
Contribution margin = $17.00 - $13.00
Contribution margin = $4.00

If Jackson Corporation purchases the part from the outside supplier, they will save 50% of the fixed costs, which is $50,000. Therefore, the new contribution margin per unit will be:

New contribution margin = $4.00 - ($50,000 ÷ 40,000 units)
New contribution margin = $2.00

Let X be the amount Jackson Corporation can spend per unit, then we can set up the following equation:

$2.00 X  = $98,000
X = $98,000 ÷ $2.00
X = $49,000

Therefore, Jackson Corporation can spend up to $49,000 on producing 40,000 units of Part P40. From this amount, we need to subtract the variable costs per unit:

$49,000 - ($6.00 + $3.00 + $4.00) = $36,000

Dividing the remaining amount by the number of units produced gives us the maximum amount that Jackson Corporation can spend per unit:

$36,000 ÷ 40,000 = $0.90

Adding this amount to the cost of purchasing from the outside supplier gives us:

$0.90 + $4.50 = $5.40

Therefore, the most Jackson Corporation can spend per unit is $5.40 if they want to achieve an operating income of $98,000. Since the cost of producing in-house is higher than the cost of purchasing from the outside supplier, they should choose to purchase from the outside supplier. The best choice is therefore (B), which is the cost of purchasing from the outside supplier.

Part P40 Is a Part Used in the Production of Air