Galley Industries can produce 100 units of a necessary component part with the following costs: $\begin{array}{lr}
\text { Direct Materials } & \$ 20,000 \
\text { Direct Labor } & 9,000 \
\text { Variable Overhead } & 21,000 \
\text { Fixed Overhead } & 8,000
\end{array}$ 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

Quizplus · Accepted Answer

The relevant costs for making the component are Direct Materials, Direct Labor, Variable Overhead, and the avoidable portion of Fixed Overhead ($2,000). Total relevant costs = $20,000 + $9,000 + $21,000 + ($8,000 - $2,000) = $56,000. Therefore, Galley should buy if the external price is below $56,000.

Galley Industries Can Produce 100 Units of a Necessary Component