1. Konrade’s Engine Company manufactures part TE456 used in several of its engine models.

Monthly production
Direct mate $40,000
Direct labo 10,000
Variable o 30,000
Fixed over 20,000
Total co $100,000
It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company pur
i. If Konrade’s Engine Company accepts the offer from the outside supplier, the monthly avoidable costs (cost
ii. If Konrade’s Engine Company purchases 1,000 TE456 parts from the outside supplier per month, then its mo
iii. The maximum price that Konrade’s Engine Company should be willing to pay the outside supplier is?
ne models. Monthly production costs for 1,000 units are as follows:

be incurred if the company purchases TE456 from the outside supplier. Konrade’s Engine Company has the option of purchasing the part
he monthly avoidable costs (costs will no longer be incurred) total?
e supplier per month, then its monthly operating income will be?
y the outside supplier is?
he option of purchasing the part from an outside supplier at $85 per unit.
Question # 02
i.

ii.

iii.
If Konrade’s Engine Company accepts the offer from the outside supplier, the monthly
avoidable costs (costs will no longer be incurred) total?

Director Material
Directo Labor
Variable Over Head Cost
Fixed Over Head Cost (20000*10%)
Total Monthly Avoidable Cost:

If Konrade’s Engine Company purchases 1,000 TE456 parts from the outside supplier per
month, then its monthly operating income will be?
Avoidable Cost
Cost of Purchase from Outside (1000*85)
Monthly Operating Profit will decrease

The maximum price that Konrade’s Engine Company should be willing to pay the
outside supplier is?
Existing Cost of Manufacturing
Units
Max Cost willing to be paid to Outside Supplier
$ 40,000
$ 10,000
$ 30,000
$ 2,000
$ 82,000

$ 82,000
$ 85,000
$ (3,000)

$ 82,000
$ 1,000
$ 82