$$\text { Use the following information for questions } 37 - 38 \text {. }$$
Eminen Music produces 60,000 blank CDs on which to record music.The CDs have the following costs:
$$\begin{array} { l l }
\text { Direct Materials } & \$ 11,000 \
\text { Direct Labour } & 15,000 \
\text { Variable Overhead } & \mathbf { 3 } , 000 \
\text { Fixed Overhead } & 7,000
\end{array}$$
-None of Eminem's fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $4,000 if the CDs were acquired externally.If cost minimization is the major consideration and the company would prefer to buy the CDs, what is the maximum external price that Eminem would be willing to accept to acquire the 60,000 units externally?
A)$36,000
B)$32,000
C)$33,000
D)$40,000

Question

$$\text { Use the following information for questions } 37 - 38 \text {. }$$
Eminen Music produces 60,000 blank CDs on which to record music.The CDs have the following costs:
$$\begin{array} { l l } 
\text { Direct Materials } & \$ 11,000 \
\text { Direct Labour } & 15,000 \
\text { Variable Overhead } & \mathbf { 3 } , 000 \
\text { Fixed Overhead } & 7,000
\end{array}$$
-None of Eminem's fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $4,000 if the CDs were acquired externally.If cost minimization is the major consideration and the company would prefer to buy the CDs, what is the maximum external price that Eminem would be willing to accept to acquire the 60,000 units externally?
A)$36,000
B)$32,000
C)$33,000
D)$40,000

Quizplus · Accepted Answer

To determine the maximum external price that Eminem would be willing to accept, we need to calculate the increase in profit contribution from buying the CDs externally and compare it to the cost savings from not producing the CDs in-house.

The increase in profit contribution is $4,000 per CD and there are 60,000 units, so the total increase in profit contribution would be 60,000 x $4,000 = $240,000.

The fixed overhead costs cannot be reduced so there will be no cost savings from not producing the CDs in-house.

Therefore, Eminem would be willing to pay up to the amount that would equal the increase in profit contribution from buying the CDs externally, which is $240,000.

The maximum external price that Eminem would be willing to pay is calculated as follows:

Maximum external price = Total increase in profit contribution / Number of units
Maximum external price = $240,000 / 60,000
Maximum external price = $4 per CD

Therefore, the maximum external price that Eminem would be willing to accept to acquire the 60,000 units externally is $4 x 10,000 = $40,000.

The answer is C) $33,000 because the maximum price that Eminem would be willing to pay is $4 per CD, which is equivalent to $40,000 for 10,000 CDs. However, if Eminem can negotiate a lower price, they would be able to maximize their profit contribution even further. Therefore, the best choice would be to do a market analysis and see if there are any suppliers who can offer the same product at a lower price than the calculated maximum external price.

Use the following information for questions 37−38. \text { Use the following information for questions } 37 - 38 \text {. } Use the following information for questions 37−38.

$\text { Use the following information for questions } 37 - 38 \text {. }$