Use the following information for questions
Hermantic, Inc.can produce 100 units of a component part with the following costs:
$$\begin{array} { l c }
\text { Direct Materials } & \$ 30,000 \
\text { Direct Labour } & 13,000 \
\text { Variable Overhead } & 32,000 \
\text { Fixed Overhead } & \mathbf { 2 2 , 0 0 0 }
\end{array}$$
-If Hermantic, Inc.purchases the units externally for $80,000, by what amount will its total costs change? Fixed costs are not avoidable if they purchase externally.
A)an increase of $80,000
B)an increase of $5,000
C)an increase of $17,000
D)a decrease of $22,000

Question

Use the following information for questions 
Hermantic, Inc.can produce 100 units of a component part with the following costs:
 $$\begin{array} { l c } 
\text { Direct Materials } & \$ 30,000 \
\text { Direct Labour } & 13,000 \
\text { Variable Overhead } & 32,000 \
\text { Fixed Overhead } & \mathbf { 2 2 , 0 0 0 }
\end{array}$$
-If Hermantic, Inc.purchases the units externally for $80,000, by what amount will its total costs change? Fixed costs are not avoidable if they purchase externally.
A)an increase of $80,000
B)an increase of $5,000
C)an increase of $17,000
D)a decrease of $22,000

Quizplus · Accepted Answer

The total cost of producing internally is the sum of direct materials, direct labor, variable overhead, and fixed overhead, which equals $30,000 + $13,000 + $32,000 + $22,000 = $97,000. If they purchase externally for $80,000, the total cost decreases by $97,000 - $80,000 = $17,000. However, since fixed costs of $22,000 are not avoidable, they effectively only save the difference between the internal production cost excluding fixed costs ($75,000) and the external purchase cost ($80,000), which is a $5,000 increase in costs.

Use the Following Information for Questions Hermantic, Inc -If Hermantic, Inc

Use the Following Information for Questions
Hermantic, Inc -If Hermantic, Inc