Question

olive corp direct materials $12 An outside supplier has offered to provide Olive Corp. with the 20,000 subcomponents at a $36 per unit price. Fixed overhead is not avoidable. If Olive Corp. accepts the outside offer, what will be the effect on short-term profits?

Answer 1

Answer:

$32

Explanation:

The incremental cost:

Direct materials +Direct labor +Variable manufacturing overhead

$12 + $8 + $12 = $32

The maximum price Olive Corp. should pay the outside supplier is $32.

Fixed manufacturing overhead was not included because it is not relevant to the decision.