Peggy Company makes and sells a product that normally sells for $57. Because of a defective...

Direct materials	$6.00 per unit
Direct labor	$2.00 per unit
Variable Overhead	$2.25 per unit
Fixed Overhead	$1.8 per unit

The company has two options regarding the defective units: (1) be sold for $8 per unit, or (2) repaired and sold at the regular price.

Q.) What is the minimum cost of repair per unit in order for the company to choose option (1)?

A.) $ per unit

Solutions

Expert Solution

The maximum amount that the company can spend will be equal to the point where the contribution from such sale is zero.

Maximum repair cost = Sales price - Direct materials - Direct labor - Variable overhead

$57 - $6 - $2 - $2.25

46.75

If the company spends $46.75 for repair, the total variable cost of one unit will be $57

And therefore the contribution from sale of such repaired unit will be zero.

Any repairs beyond $46.75 will result in negative contribution.

Therefore,

Maximum cost of repair per unit in order for the company to choose option 2

$46.75

Per unit

ekkarill92 answered 1 year ago

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