Ruth Company produces 1,000 units of a necessary component with the following costs: $$\begin{array} { l r }
\text { Direct Materials } & \$ 34,000 \
\text { Direct Labor } & 15,000 \
\text { Variable Overhead } & 9,000 \
\text { Fixed Overhead } & 10,000
\end{array}$$ Ruth Company could avoid $6,000 in fixed overhead costs if it acquires the components externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Ruth Company would accept to acquire the 1,000 units externally?
A) $58,000
B) $64,000
C) $59,000
D) $62,000

Question

Ruth Company produces 1,000 units of a necessary component with the following costs: $$\begin{array} { l r } 
\text { Direct Materials } & \$ 34,000 \
\text { Direct Labor } & 15,000 \
\text { Variable Overhead } & 9,000 \
\text { Fixed Overhead } & 10,000
\end{array}$$ Ruth Company could avoid $6,000 in fixed overhead costs if it acquires the components externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Ruth Company would accept to acquire the 1,000 units externally?
A) $58,000
B) $64,000
C) $59,000
D) $62,000

Quizplus · Accepted Answer

The maximum external price Ruth Company would accept is the total cost of producing the components internally minus the fixed overhead costs that can be avoided by not producing them. The total internal production cost is $34,000 (Direct Materials) + $15,000 (Direct Labor) + $9,000 (Variable Overhead) + $10,000 (Fixed Overhead) = $68,000. If $6,000 of the fixed overhead can be avoided, the maximum acceptable external price is $68,000 - $6,000 = $62,000. However, the correct calculation should result in $62,000, indicating a mistake in the selection of the correct option based on the provided explanation. The correct answer should be D) $62,000, based on the calculation provided.

Ruth Company Produces 1,000 Units of a Necessary Component with the Following