Sundown Sunglass Company currently manufactures the frames used in its sunglasse
ID: 2431282 • Letter: S
Question
Sundown Sunglass Company currently manufactures the frames used in its sunglasses. Here are Sundown's most recent data regarding this key component part: 10,000 $300,000 $165,000 of frames produced annually Fixed production costs Variable production costs in lieu of manufacturing the frames in-house, Sundown can purchase the frames from an outside supplier. If Sundown purchases the frames from the outside supplier, it would avoid 35% of the fixed production costs. To maintain its current level of operating income, what is the highest price Sundown can pay the outside supplier for each frame? $10.50 $27.00 $1650 $36.50 None of the aboveExplanation / Answer
Solution :The correct answer is the 2nd option i.e $ 27.00 / frame(See working note)
Working Note
Costs avoided by Purchasing the frames and not manufacturing it in house.
Fixed Cost( 35% of Total Production cost i.e 0.35*$3,00,000) =$ 1,05,000
Variable Cost of Manufacturing (100 % of $1,65,000) =$1,65.000
Total Avoidable Costs =$ 2,70,000
Total Number of Frames = 10,000 frames
Avoidable Cost /frame= $ 27/frame i.e the maximum price the company would pay for the frames is the Total Cost Avoided by not manufacturing the frames in house.