Answer the following question(s) using the information below.
Schmidt Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 10,000 units of this part are as follows:
Of the fixed factory overhead costs, $30,000 is avoidable.
-Assuming accepting the offer creates excess facility capacity that can be used to produce 2,000 units of another product that has a unit selling price of $24, variable costs of $12, and fixed cost allocation of $3. What is the highest price that Schmidt should be willing to pay Phil Company for 10,000 units of the part?
A) $146,000
B) $164,000
C) $116,000
D) $134,000
E) $186,000

Question

Answer the following question(s) using the information below.
Schmidt Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 10,000 units of this part are as follows:
  Of the fixed factory overhead costs, $30,000 is avoidable.
-Assuming accepting the offer creates excess facility capacity that can be used to produce 2,000 units of another product that has a unit selling price of $24, variable costs of $12, and fixed cost allocation of $3. What is the highest price that Schmidt should be willing to pay Phil Company for 10,000 units of the part?
A) $146,000 
B) $164,000 
C) $116,000 
D) $134,000 
E) $186,000

Quizplus · Accepted Answer

The opportunity cost of using the capacity for the new product is $24 - $12 = $12 per unit. For 2,000 units, this is $24,000. The maximum price Schmidt should pay is the cost of producing the part internally ($140,000) minus the opportunity cost ($24,000), which equals $116,000.

Answer the Following Question(s) Using the Information Below