Bell's Shop can make 1,000 units of a necessary component with the following costs: $$\begin{array} { l r }
\text { Direct Materials } & \$ 24,000 \
\text { Direct Labor } & 6,000 \
\text { Variable Overhead } & 3,000 \
\text { Fixed Overhead } & ?
\end{array}$$ 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

Bell's Shop can make 1,000 units of a necessary component with the following costs: $$\begin{array} { l r } 
\text { Direct Materials } & \$ 24,000 \
\text { Direct Labor } & 6,000 \
\text { Variable Overhead } & 3,000 \
\text { Fixed Overhead } & ?
\end{array}$$ 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.

Quizplus · Accepted Answer

The total cost of making the component internally is equal to the external purchase price of $39,000 when the company is indifferent between making or buying. The sum of direct materials, direct labor, and variable overhead is $24,000 + $6,000 + $3,000 = $33,000. Therefore, the fixed overhead costs that make the company indifferent to making or buying must be $39,000 - $33,000 = $6,000. However, since there are unavoidable fixed costs of $2,000 when purchasing externally, the actual fixed overhead costs when making the component must be $6,000 + $2,000 = $8,000 to achieve indifference.

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