Reference no: EM132661995

Make or buy

Aproposal is received from an outside supplier who will make and ship high-style pens directly to the Class Company's customers as sales orders are forwarded from Class's sales staff. If the supplier's offer is accepted, the present plant facilities will be used to make a new pen whose unit costs will be:

Variable manufacturing cost $5.00

Fixed manufacturing cost 1.00

Variable Marketing cost 2.00

Fixed marketing cost 0.50

• Total fixed manufacturing overhead will be unchanged from the original level given at the beginning of HO #8. Fixed marketing costs for the new pens are over and above the fixed marketing costs incurred for marketing the high-style pens at the beginning of HO #8. The new pen will sell for $9. The minimum desired operating income on the two pens taken together is $50,000 per year.

Problem 1: What is the maximum purchase cost per unit that the Class Company would be willing to pay for subcontracting the production of the high-style pens?