The Pearson Company manufactures a variety of electronic printed circuit boards (PCBs) that go into cellular phones. The company has just received an offer from an outside supplier to provide the electrical soldering for PearsorTs Motorola product line (Z-7 PCB, slim line). The quoted price is $4.80 per unit. Pearson is interested in this offer, since its own soldering operation of the PCB is at its peak capacity.
• Outsourcing option: The company estimates that if the supplier's offer were accepted, the direct labor and variable overhead costs of the Z-7 slim line would be reduced by 15%, and the direct material cost would be reduced by 20%.
• In-house production option: Under the present operations, Pearson manufactures all of its own PCBs from start to finish. The Z-7 slim lines are sold through Motorola at $20 per unit. Fixed overhead charges to the Z-7 slim line total $20,000 each year. The further breakdown of producing one unit is
Direct materials.......................... $7.50
Direct labor.............................. $5.00
Manufacturing overhead............... $4.00
Total cost................................. $16.50
The manufacturing overhead of $4.00 per unit in- (b) What is the maximum unit price that Pearson dudes both variable and fixed manufacturing over- Company should be willing to pay the outside head based on a production of 100,000 units each year.
(a) Should Pearson Company accept the outside supplier's offer?
(b) What is the maximum unit price that Pearson Company should be willing to pay the outside supplier?