This answer includes the fixed indirect cost and the amount of the decrease in marketing costs as avoidable costs.
This answer assumes that $1.00 of indirect fixed cost is avoidable.
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 variable marketing cost will decrease from $2.50 per unit to $1.75 per unit ($2.50 × .70, since 30% of the cost is avoidable). 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. The variable marketing cost associated with purchasing the part externally would be $1.75, and that would be the only other cost in addition to the cost for the part. Therefore, the company needs to be able to buy the part for no more than $8.50 minus $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. Another way to look at this is to total the avoidable costs if the company purchases the part externally. The avoidable costs include direct materials ($2.00), direct labor ($2.40), variable indirect ($1.60) and $.75 of variable marketing costs (the difference between $2.50 and $1.75), for a total of $6.75. Therefore, the maximum amount per unit that the company would pay an outside supplier would be $6.75.
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.
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The company must decide to continue making the product or buy it from an outside supplier. The supplier has offered to make the product at the same level of quality that the company can make it. Fixed marketing costs would be unaffected, but variable marketing costs would be reduced by 30% if the company were to accept the proposal. What is the maximum amount per unit that the company can pay the supplier without decreasing operating income?