The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000. Direct materials $ 20,000 Direct labor 55,000 Variable overhead 45,000 Fixed overhead 70,000 Total $ 190,000 The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit. If CJP accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of CJP's facilities could be rented to a third party for $15,000 per year. At what price would CJP be indifferent to XYZ's offer?

$17.5

Explanation:

Direct Labour-          55000

Variable Overhead- 45000

Fixed overhead-       70000

Direct material-         20000

Total =                      $190,000

Total relevant cost of manufacturing = Direct material + Direct labour + Variable overhead + Avoidable Fixed cost + Opportunity cost

Where Avoidable fixed cost = 10,000 units * 4 = 40.000

0pportunity cost= $15,000

Total relevant cost of manufacturing = 25000 + 55000 + 45000 + 40000 + 15000 = $175,000

Now, Price that CJP would be indifferent to XYZ Offer can be derived by: Total Relevant Cost of Manufacturing / No of unit product

= $175,000 / 10,000 units

=$17.5

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