Greenwond Inc. can make 1000 units of a necessary component with the following costs: T $\begin{array}{lr}
\text { Direct Materials } & \$ 72,000 \
\text { Direct Labor } & 18,000 \
\text { Variable Overhead } & 9,000 \
\text { Fixed Overhead } & ?
\end{array}$ he company can purchase the 1000 units externally for $117000. The avoidable fixed costs are $6000 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) $24000
B) $18000
C) $12000
D) Cannot be determined.

Question

Quizplus · Accepted Answer

The total cost of making the component internally is the sum of direct materials, direct labor, variable overhead, and fixed overhead. Since the company is indifferent between making or buying at an external price of $117,000, and the avoidable fixed costs are $6,000, the fixed overhead costs can be calculated by setting the total internal cost equal to the external purchase cost minus avoidable fixed costs. Thus, $72,000 (Direct Materials) + $18,000 (Direct Labor) + $9,000 (Variable Overhead) + Fixed Overhead = $117,000 - $6,000. Solving for Fixed Overhead gives $24,000.

Greenwond Inc He Company Can Purchase the 1000 Units Externally for $117000