Ahrends Corporation Makes 70,000 Units Per Year of a Part

question 143

Multiple Choice

Ahrends Corporation makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $48.50 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $273,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $8.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.
What is the financial advantage (disadvantage) of purchasing the part rather than making it? (Round your intermediate calculations to 2 decimal places.)

• A) $273,000
• B) ($126,000)
• C) $147,000
• D) $448,000

---

Definitions:

Predatory Pricing

A strategy where a company sets extremely low prices with the intent to eliminate competition or deter new entrants to the market.

Experience-Curve Pricing

A pricing strategy that assumes costs will decrease over time as experience in production increases, leading to lower prices for consumers.

Marketing Strategies

Plans and tactics implemented by companies to promote and sell their products or services, aiming to achieve competitive advantage and meet customer needs.

EDLP Retailer

A retailer that consistently offers low prices across its products as part of its pricing strategy, avoiding traditional sales or discounts.