A. A cost of $8.50 per unit would result in a decrease in operating income, because the additional marketing costs would cause the total variable cost per unit to increase above its present amount.
B. This answer includes the fixed indirect cost and the amount of the decrease in marketing costs as avoidable costs.
C. This answer assumes that $1.00 of indirect fixed cost is avoidable.
D. The goal is to find a cost for the part to be purchased externally that makes the total per unit cost for the externally purchased part no greater than the total per unit cost for the product purchased internally. For purposes of this comparison, fixed costs are not relevant because they will be the same whether the company purchases the product outside or manufactures it internally. So we look only at variable costs. The total variable cost to produce and market the part internally is $8.50 ($2.00 + $2.40 + $1.60 + $2.50). If the part is purchased outside, the marketing cost will decrease from $2.50 per unit to $1.75 per unit ($2.50 × .70). We need to make sure that the total variable cost to purchase the part externally and market it are no more than $8.50 per unit. Since the marketing cost associated with buying the part is $1.75, the company needs to be able to buy the part for no more than the difference between $8.50 and $1.75, which is $6.75. If the company pays any more than $6.75 for the part, its total cost to buy and market the product will be greater than $8.50 per unit, and that will cause its operating income to decrease. Therefore, the maximum amount per unit that the company would pay an outside supplier would be $6.75, because the avoidable costs are $6.75 ($8.50 - $1.75).
