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

question 163

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 maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 70,000 units required each year?

• A) $50.60 per unit
• B) $3.90 per unit
• C) $58.80 per unit
• D) $54.90 per unit

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Definitions:

DuPont Cellophane Case

The antitrust case brought against DuPont in which the U.S. Supreme Court ruled (in 1956) that while DuPont had a monopoly in the narrowly defined market for cellophane, it did not monopolize the more broadly defined market for flexible packaging materials. It was thus not guilty of violating the Sherman Act.

Relevant Market

The market segment in which a company competes, defined by its products, customers, and geographic area.

Structure Versus Behavior

A distinction in competition policy and economic regulation focusing on the organization and arrangements of firms (structure) versus their actual conduct (behavior) in the market.

Rule Of Reason

The principle that not all actions deemed as restrictive of trade are illegal, depending on whether they are unreasonable restraints.