Midway Company manufactures a part for its production cycle. The costs per unit
ID: 2414971 • Letter: M
Question
Midway Company manufactures a part for its production cycle. The costs per unit for 40,000 units of the part are as follows:
Per Unit
Direct materials
$5.00
Direct labor
7.00
Variable factory overhead
2.00
Fixed factory overhead
4.00
Total costs
$18.00
The fixed factory overhead costs are unavoidable. Assume no other use for the facilities. What is the highest price Midway Company should pay for the part from an outside supplier?
Per Unit
Direct materials
$5.00
Direct labor
7.00
Variable factory overhead
2.00
Fixed factory overhead
4.00
Total costs
$18.00
Explanation / Answer
Since the Fixed overhead costs are unavoidable, they are sunk costs and have no relevance in decision making and are to be ignored while determining the total costs.
So, Relevant costs are as follows:
So, maximum price Midway Company should pay for the part from an outside supplier is the variable cost currently incurred that is $14 per unit.
Particulars Per Unit Direct materials 5.00 Direct labor 7.00 Variable factory overhead 2.00 Total variable costs 14.00