Question
Jennas Jeans produces 40,000 pairs of jeans each month for a total cost of $500,000. The costs are described below. Manufacturing overhead is 40% variable.
Jennas Jeans produces 40,000 pairs of jeans each month for a total cost of $500,000. The costs are described below. Manufacturing overhead is 40% variable.
Direct materials | $200,000 |
Direct labor | 180,000 |
Manufacturing overhead | 120,000 |
Total | $500,000 |
Zippers represent an important component of jeans. Jenna currently makes the zippers for her jeans, but she has considered purchasing them from Zacchaeuss Zippers instead. Jennas current monthly cost for zippers are as follows:
Direct materials | $5,000 |
Direct labor | 15,000 |
Manufacturing overhead | 20,000 |
Total | $40,000 |
If Jenna purchases zippers instead of making them, she can avoid 60% of the manufacturing overhead related to zippers. Additionally, discontinuing the zippers will allow Jenna to produce and sell 4,000 more jeans each month. What is the highest price Jenna can pay Zacchaeus for each zipper, such that buying zippers is would be better than making them?
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