Bell's Shop can make 1,000 units of a necessary component with the following costs: $\begin{array}{lr}
\text { Direct Materials } & \$ 24,000 \
\text { Direct Labor } & 6,000 \
\text { Variable Overhead } & 3,000 \
\text { Fixed Overhead } & ?
\end{array}$ The company can purchase the 1,000 units externally for $39,000. The unavoidable fixed costs are $2,000 if the units are purchased externally. An analysis shows that at this external price, the company is indifferent between making or buying the part. What are the fixed overhead costs of making the component?
A)$8,000
B)$6,000
C)$4,000
D)Cannot be determined.

Question

Quizplus · Accepted Answer

The total cost of making the component is $39,000, which includes $24,000 (Direct Materials) + $6,000 (Direct Labor) + $3,000 (Variable Overhead) + Fixed Overhead. Since the company is indifferent between making or buying, the total cost of making must equal the purchase price of $39,000. Therefore, Fixed Overhead = $39,000 - ($24,000 + $6,000 + $3,000) = $6,000. However, since $2,000 of fixed costs are unavoidable, the total fixed overhead must be $8,000 to account for the $6,000 that can be avoided by not making the component.

Bell's Shop Can Make 1,000 Units of a Necessary Component