Stewart Industries has been producing two bearings, components B12 and B18, for use in production.
B12 B18
Machine hours required per unit 2.5 3.0
Standard cost per unit:
Direct material $ 2.25 $ 3.75
Direct labor 4.00 4.50
Manufacturing overhead:
Variable (See Note 1) 2.00 2.25
Fixed (See Note 2) 3.75 4.50
$12.00 $15.00
Stewart's annual requirement for these components is 8,000 units of B12 and 11,000 units of B18. Recently, Stewart's
management decided to devote additional machine time to other product lines resulting in only 41,000 machine hours
per year that can be dedicated to the production of the bearings. An outside company has offered to sell Stewart the
annual supply of the bearings at prices of $11.25 for B12 and $13.50 for B18. Stewart wants to schedule the otherwise
idle 41,000 machine hours to produce bearings so that the company can minimize its costs (maximize its net benefits).
Note 1. Variable manufacturing overhead is applied on the basis of direct labor hours.
Note 2. Fixed manufacturing overhead is applied on the basis of machine hours.
Assume that Stewart's idle capacity of 41,000 machine hours has a traceable unavoidable annual fixed cost of $44,000
that will continue if the capacity is not used. The maximum price Stewart would be willing to pay a supplier for
component B18 is
A. $14.50.
B. Some amount other than those given.
C. $14.00.
D. $10.50.
Please explain me this question answer
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Nitesh Anchan
Accountant
Dubai
United Arab Emirates
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