McGraw Inc.manufactures 12,000 units of a part used in its production to manufacture guitars.The annual production activities related to this part are as follows: Hill Inc.has offered to sell 12,000 units of the same part to McGraw for $22 per unit.If McGraw were to accept the offer,some of the facilities presently used to manufacture the part could be rented to a third party at an annual rental of $18,000.Moreover,$4 per unit of the fixed overhead applied to the part would be totally eliminated.
-In the decision to make or buy the part,what is the relevant fixed overhead for McGraw Inc.?
A)$30,000
B)$54,000
C)$84,000
D)$48,000

Question

McGraw Inc.manufactures 12,000 units of a part used in its production to manufacture guitars.The annual production activities related to this part are as follows:  Hill Inc.has offered to sell 12,000 units of the same part to McGraw for $22 per unit.If McGraw were to accept the offer,some of the facilities presently used to manufacture the part could be rented to a third party at an annual rental of $18,000.Moreover,$4 per unit of the fixed overhead applied to the part would be totally eliminated.
-In the decision to make or buy the part,what is the relevant fixed overhead for McGraw Inc.?
A)$30,000 
B)$54,000 
C)$84,000 
D)$48,000

Quizplus · Accepted Answer

The relevant fixed overhead for McGraw Inc. is the $4 per unit of fixed overhead applied to the part mentioned in the question.
Annual Fixed Overhead incurred by McGraw = 12,000 units * $4 per unit = $48,000

If McGraw accepts the offer and buys the part, they can save $4 per unit of fixed overhead applied to the part, which amounts to a total of $48,000 annually. Additionally, they can rent out some of their facilities for $18,000 per annum.

Therefore, McGraw should buy the part from Hill Inc. and save $48,000 on fixed overhead and $18,000 on rental expenses, which makes accepting the offer more cost-effective.