AFM Company makes 40,000 motors to be used in the production of its power lawn mowers.
The cost per motor at this level of activity is as follows:
direct materials .............. $12.00
direct labor .................. 9.25
variable overhead ............. 5.60
fixed overhead ................ 4.00
total ......................... $30.85
The motor has recently become available from an outside supplier for $29 per motor. If AFM purchases the motor from the outside supplier, the space that is currently being used to manufacture the motor can be rented out for $30,000 per year.
Assume that 40% of the fixed overhead costs will be eliminated if the motor is purchased from the outside supplier.
Calculate the selling price per unit charged by the outside supplier that would make AFM economically indifferent between making and buying the motor.