Answer the following questions using the information below:
Donald's Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows:
It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Donald's Engine Company has the option of purchasing the part from an outside supplier at $42.50 per unit.
-The maximum price that Donald's Engine Company should be willing to pay the outside supplier is:
A)$40 per TE456 part
B)$41 per TE456 part
C)$49 per TE456 part
D)$50 per TE456 part

Question

Answer the following questions using the information below:
Donald's Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows:
  It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Donald's Engine Company has the option of purchasing the part from an outside supplier at $42.50 per unit.
-The maximum price that Donald's Engine Company should be willing to pay the outside supplier is:
A)$40 per TE456 part 
B)$41 per TE456 part 
C)$49 per TE456 part 
D)$50 per TE456 part

Quizplus · Accepted Answer

To determine the maximum price that Donald's Engine Company should be willing to pay the outside supplier, we need to calculate the total cost savings that the company would incur by purchasing TE456 from the outside supplier.

Total cost savings = (10% * $5,000 fixed overhead costs) + ($42.50 - $40 variable costs) * 1,000 units

Total cost savings = $500 + $2,500

Total cost savings = $3,000

Therefore, the maximum price that Donald's Engine Company should be willing to pay the outside supplier is:

$40 (variable costs) + $3 (additional markup) = $43

Since the outside supplier is offering TE456 at a price of $42.50 per unit, Donald's Engine Company should be willing to purchase from the supplier as long as the price is not higher than $43. Therefore, the best choice is B.

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