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.

What issues should be considered when making decisions about outsourcing and eliminating the production of a key sub assembly for products manufactured by a company? Your answer should be presented as a bulleted list.

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Explain how using a predetermined overhead rate can affect profits and losses? That is, why might the predetermined overhead be inaccurate when compared to the actual results of the activities affected by the predetermined overhead rate? Your answer should begin by explaining how a predetermined overhead rate is calculated and conclude with why there would be variances from the original estimated values in the calculation (do not discuss any variables except those directly related to the predetermined overhead rate calculation).

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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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