Olive Corp. currently makes 20,000 subcomponents a year in one of its factories. The unit costs to produce are: Per unit Direct materials $ 12 Direct labor 8 Variable manufacturing overhead 12 Fixed manufacturing overhead8 Total unit cost #40 An outside supplier has offered to provide Olive Corp. with the 20,000 subcomponents at a $36 $36 per unit price. Fixed overhead is not avoidable. What is the maximum price Olive Corp. should pay the outside supplier?

a. $32
b. $36
c. $40
d. $44

a. $ 32

Explanation:

Computation of purchase price

The company can make the components with a variable cost which is as follows:

Direct Materials per unit                                                    $ 12

Direct Labour    per unit                                                    $   8

Variable Manufacturing overhead per unit                     $  12

Total Variable Cost  per unit                                             $ 32

Since the fixed manufacturing overhead shall not be reduced, the maximum price that can be paid is the internal variable costs.

So the maximum purchase price is $  32                                  

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