Reference no: EM132446711

Question - Donald's Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows:

Direct materials $ 20,000

Direct labor 5,000

Variable overhead costs 15,000

Fixed overhead costs 10,000

Total costs $50,000

It is estimated that 20% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Donald's Engine Company has the option of purchasing the part from an outside supplier at $42.50 per unit.

Required -

1. If Donald's Engine Company accepts the offer from the outside supplier, calculate the monthly avoidable costs (costs that will no longer be incurred) total?

2. If Donald's Engine Company purchases 1,000 TE456 parts from the outside supplier per month, then calculate its monthly operating income?

3. Calculate the maximum price that Donald's Engine Company should be willing to pay the outside supplier?