Davidson Company produces a part that is used in the manufacture of one of its products.The costs associated with the production of 5,000 units of this part are as follows:
$\begin{array}{ll}
\text { Direct materials } & \$ 108,000 \
\text { Direct labor } & 156,000 \
\text { Variable factory overhead } & 70,000 \
\text { Fixed factory overhead } & \underline{168,000} \
\text { Total costs }&\$502,000
\end{array}$
Of the fixed factory overhead costs,$72,000 are avoidable.Assuming there is no other use for the facilities.What is the highest price Davidson Company should be willing to pay for 5,000 units of the part?
A) $264,000
B) $334,000
C) $406,000
D) $502,000

Question

Quizplus · Accepted Answer

The highest price Davidson should be willing to pay is the total cost minus the avoidable fixed costs: $502,000 - $72,000 = $430,000. However, since the question asks for the highest price for 5,000 units, we should consider only the variable costs and avoidable fixed costs: $108,000 (materials) + $156,000 (labor) + $70,000 (variable overhead) + $72,000 (avoidable fixed overhead) = $406,000.

Davidson Company Produces a Part That Is Used in the Manufacture