- Make or Buy

The Boles Company manufactures and sells several products, one of which is called PAX. The company normally sells 30,000 units of the PAX each month. At this activity level, unit costs are:

Direct materials..............................................$4

Direct labor.......................................................$3

Variable manufacturing overhead.........$4

Fixed manufacturing overhead..............$5

Variable selling................................................$3

Fixed selling.....................................................$1

An outside supplier has offered to produce PAX for the Boles Company, and to ship them directly to the Boles Company's customers. This arrangement would permit the Boles Company to reduce its variable selling expenses by one third (due to elimination of freight costs). The facilities now being used to produce the slip differentials would be idle and fixed manufacturing overhead would continue at 60 percent of its present level. The total fixed selling expenses of the company would be unaffected by this decision.

Required: What is the maximum acceptable price quotation for units of PAX from the outside supplier? (Hint: It would have to be less than it costs Boles to produce one unit of PAX.)