WLS Company currently makes a key component for their tractors in house. The costs are as follows:
Per Unit
Direct Materials $ 4.00
Direct Labor             6.00
Allocated Overhead          10.00
Total Cost        $20.00
If the component is purchased from an outside vendor the company will reduce their overhead costs by 80%. What is the maximum purchase price the company should consider to move to an outside vendor without respect to any other issue?
(present calculations for partial credit). Label your answer.

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The maximum purchase price to be considered is simply equal to the incremental costs the company will incur should it choose to produce the component themselves.
It is equal to the sum of direct materials, direct labor and variable overhead costs, which is 80% of the allocated $10 overhead cost.
Maximum Purchase Price = 4 + 6 + 8 = 18
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