Question

Foto Company makes 50,000 units per year of a part it uses in the products
it manufactures. The cost per unit of this part is shown below:

direct materials .............. $13.00
direct labor ..................  10.10
variable overhead .............   6.50
allocated fixed overhead ......   8.60
total ......................... $38.20

An outside supplier has offered to sell Foto Company 50,000 of these parts
for $31.60 per 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 earned on this
other product would be $120,000 per year.

Calculate the selling price per unit charged by the outside supplier that
would make Foto economically indifferent between making and buying the part.

Answer 1

Solution:
	Selling price per unit charged by the outside supplier that would make Foto economically indifferent between making and buying the part			$32 per unit
Working Notes:
	Cost charged by outside supplier would be economically indifferent to FOTO if it will be equal to total avoidable cost and opportunity cost for the facilities.
	total avoidable cost + opportunity cost = selling price per unit charged by outside suppliers x units sold
	Avoidable cost per unit = direct material + direct labor + variable OH
		=$13 + $10.10 + $6.50
		=$29.60
	opportunity cost = contribution margin from the facilities if buy from outside = $120,000
	total avoidable cost + opportunity cost = selling price per unit charged by outside suppliers x units sold
Avoidable cost per unit x units sold + opportunity cost = selling price per unit charged by outside suppliers x units sold
	$29.60 x 50,000 + $120,000 = selling price x 50,000
	$1,480,000 + $120,000 = selling price x 50,000
	1,600,000 = selling price x 50,000
	Selling price per unit = $1,600,000/50,000
	Selling price per unit = $32
Hence,	$32 Selling price per unit charged by the outside supplier that would make Foto economically indifferent between making and buying the part
Please feel free to ask if anything about above solution in comment section of the question.