Question
Corp currently makes a component but is thinking of outsourcing its production. Its costs to make the component are as follows (based on an output
Corp currently makes a component but is thinking of outsourcing its production. Its costs to make the component are as follows (based on an output of 100 units):
DM 400
DL 300
VAR. O/H 100
Fixed O/H. 200
Total manuf. costs for 100 units $1,000
Assume Corp can purchase (outsource) the components for $9 per unit. Assume that, if it outsources, $125 of FC are avoidable. In addition, assume that, by outsourcing, Corp can free up capacity that can be used to manufacture a different product and generate $300 of additional operating income. At what price per unit would the vendor need to sell the component to Corp such that Corp's operating income would not change regardless of whether or not it outsourced the component?
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