Aholt Company Makes 40,000 Units Per Year of a Part

question 90

Multiple Choice

Aholt Company makes 40,000 units per year of a part that it uses in the products it manufactures. The unit product cost of this part is computed as follows:

$\begin{array}{|l|r|}\hline \text { Direct Materials } & \$ 11.30 \\\hline \text { Direct Labour } & \$ 22.70 \\\hline \text { Variable Manufacturing Overhead } & \$ 1.20 \\\hline \text { Fixed Manufactiong Overhead } & \$ 24.70 \\\hline \text { Unit Product Cost } & \$ 59.90\\\hline \end{array}$ An outside supplier has offered to sell the company all the parts that Aholt needs for $46.20 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 $264,000 per year.

If the part were purchased from the outside supplier, all direct labour cost of the part would be avoided. However, $21.90 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 40,000 units required each year?

• A) $6.60.
• B) $44.60.
• C) $59.90.
• D) $66.50.

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Definitions:

Electrophilic

Describes a chemical species that is attracted to electrons and tends to accept electrons during chemical reactions.

Nucleophilic Attack

The process by which a nucleophile forms a bond with a positive or partially positive atom in another molecule.

Organic Product

A chemical compound of organic origin or derived from living organisms.

Organic Product

Any compound containing carbon atoms that is produced from organic reactions involving organic compounds.