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1) Olive Corp currently makes 20,000 subcomponents a year in one of its factories
1) Olive Corp currently makes 20,000 subcomponents a year in one of its factories. The unit costs to produce
are:
Direct Materials 12
Direct Labor 8
Variable manufacturing overhead 12
Fixed manufacturing overhead 8
An outside supplier has offered to provide Olive Corp with the 20,000 subcomponents at a P36 per unit price.
Fixed overhead is not avoidable. If Olive Corp rejects the outside offer, what will be the effect on short-term profits?
2) Olive Corp currently makes 20,000 subcomponents a year in one of its factories. The unit costs to produce
are:
Direct Materials 12
Direct Labor 8
Variable manufacturing overhead 12
Fixed manufacturing overhead 8
An outside supplier has offered to provide Olive Corp with the 20,000 subcomponents at a P36 per unit
price. Fixed overhead is not avoidable. What is the maximum price Olive Corp should pay the outside supplier?
Expert Solution
1)
Variable Manufacturing Cost = Direct Materials + Labor + Variable Manufacturing Overhead
=$12+8+12
= $32
Loss if accept offer of outsider =($36-$32)*20,000 units = $80,000
If Olive Corp accepts the outside offer, short-term profits will be decrease from $80,000.
2) Please see the attachment.
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