Galley Industries can produce 100 units of a necessary component part with the following costs: $$\begin{array} { l r }
\text { Direct Materials } & \$ 20,000 \
\text { Direct Labor } & 9,000 \
\text { Variable Overhead } & 21,000 \
\text { Fixed Overhead } & 8,000
\end{array}$$ If Galley Industries purchases the component externally, $2,000 of the fixed costs can be avoided. Below what external price for the 100 units would Galley choose to buy instead of make?
A)$50,000
B)$56,000
C)$44,000
D)$52,000

Question

Galley Industries can produce 100 units of a necessary component part with the following costs: $$\begin{array} { l r } 
\text { Direct Materials } & \$ 20,000 \
\text { Direct Labor } & 9,000 \
\text { Variable Overhead } & 21,000 \
\text { Fixed Overhead } & 8,000
\end{array}$$ If Galley Industries purchases the component externally, $2,000 of the fixed costs can be avoided. Below what external price for the 100 units would Galley choose to buy instead of make?
A)$50,000
B)$56,000
C)$44,000
D)$52,000

Quizplus · Accepted Answer

The total cost to make the component is $58,000 ($20,000 + $9,000 + $21,000 + $8,000). If $2,000 of fixed costs can be avoided by purchasing externally, the relevant cost to make is $56,000. Therefore, Galley would choose to buy if the external price is below $56,000.

Galley Industries Can Produce 100 Units of a Necessary Component