Reference no: EM13325070

ABC Company would like to purchase a particular item from a potential supplier. ABC does not know the supplier's specific cost structure for producing this item, but hope to estimate the cost using some information gathered from the supplier. After a couple of meetings with the supplier, ABC is able to gather the following information.

If the purchase price is $12, the supplier requires at least 6,000 units to avoid a loss (break-even).
If the purchase price is $15, the supplier requires at least 4,000 units to avoid a loss (break-even).
The supplier's SGA expense (selling, general, administrative) is estimated to be $1.5 per unit.
The supplier's direct material cost is estimated to be $2 per unit.
The supplier's material to labor ratio is estimated to be 1.25.

ABC finally agrees to pay $12 per unit and anticipates a volume of 8,000 in the upcoming year. Based on the information above, answer the following questions.

1. Using the break-even analysis technique, identify the supplier's fixed and variable cost for producing this item. (Assuming the variable cost increases linearly with the purchase volume)

2. What is the unit production cost for the supplier? If the supplier uses the cost markup pricing model for pricing, what is the markup (in terms of percentage)? What is the profit margin rate (in terms of percentage) if the supplier uses the margin pricing model?

3. Assuming the supplier's production cost for this item only consists of SGA, direct material, direct labor, and overhead, identify the cost per unit each of the components contributes.

4. Assuming the SGA expense is fixed cost, and material and labor costs are variable costs, what percentage of the overhead cost are variable?