Lewis Auto Company Manufactures a Part for Use in Its

question 145

Essay

Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 items are produced, the costs per unit are:
Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a savings of $180,000 if Lewis Auto accepts the supplier's offer. In addition, $20 per unit of fixed manufacturing overhead on the original part would be eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Lewis Auto Company? By how much?

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Definitions:

Equilibrium Price

The price in the market where the amount of goods being offered matches the amount of goods people want to buy.

Increase

A situation where there is a rise in magnitude, quantity, or degree.

Quantity Demanded

A specific quantity of a good that buyers are interested in purchasing at a certain price point.

Law of Demand

The principle that, ceteris paribus, there is an inverse relationship between the price of a good and the quantity demanded.