Melbourne Corporation Has Traditionally Made a Subcomponent of Its Major

question 87

Multiple Choice

Melbourne Corporation has traditionally made a subcomponent of its major product. Annual production of 30,000 subcomponents results in the following costs: Melbourne has received an offer from an outside supplier who is willing to provide the 30,000 units of the subcomponent each year at a price of $28 per unit. Melbourne knows that the facilities now being used to manufacture the subcomponent could be rented to another company for $80,000 per year if the subcomponent were purchased from the outside supplier. There would be no effect of this decision on the total fixed manufacturing overhead of the company. Assume that direct labor is a variable cost.
At what price per unit charged by the outside supplier would Melbourne be indifferent between making or buying the subcomponent?

• A) $29 per unit
• B) $25 per unit
• C) $21 per unit
• D) $24 per unit

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Definitions:

Scarcity

The basic economic issue arises from endless human desires and needs in a context of scarce resources.

Full Production

The level of production where a company or economy is maximizing its use of resources and operating at its highest efficiency.

Full Employment

Refers to the condition in the labor market where virtually all who are willing and able to work at prevailing wage rates are employed.

Capital Goods

Goods that are used in producing other goods and services, rather than being bought by consumers. This includes machinery, buildings, and equipment.