Desert Industries manufactures 5,000 units of Part X300 each month for use in production. The facilities now being used to produce Part X300 have fixed monthly overhead costs of $65,000, and a theoretical capacity to produce 7,000 units per month. If Desert were to buy Part X300 from an outside supplier, the facilities would be idle and 80% of the fixed costs would continue to be incurred. There are no alternative uses for the production facilities. The variable production costs of Part X300 are $30 per unit. Fixed overhead is allocated based on planned production levels.
If Desert Industries continues to use 5,000 units of Part X300 each month, it would realize a net benefit by purchasing Part X300 from an outside supplier only if the supplier's unit price is less than what amount?

The correct answer is $32.6.

Explanation:

According to the scenario, computation of the given data are as follow:-

Variable production cost per unit = $30

If X300 buy from outside than variable cost(avoidable fixed cost) = ($65,000 × 20 ÷ 100) ÷ 5,000 units

= $2.6 per unit  

We can calculate the total cost by using following formula :-

Total cost = Variable production cost per unit + Avoidable fixed cost

= $30 + $2.6

= $32.6

According to the analysis if outside supplier has less than $32.6 unit price only then its profitable for company.  

correct, but each time you dont pay the price of the penalty can increase.

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