Taylor 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: Direct materials, $24,000
Direct labor, $60,000
Variable overhead, $54,000
Fixed overhead, $84,000
Best Guitars, Inc., has offered to sell 12,000 units of the same part to Taylor for $22 per unit. If Taylor 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?
A) $30,000
B) $54,000
C) $84,000
D) $48,000

Question

Quizplus · Accepted Answer

The relevant fixed overhead is the portion of fixed overhead that would be eliminated if the part were purchased from Best Guitars, Inc. This amount is $4 per unit, or $48,000 (12,000 units x $4 per unit).

Taylor Manufactures 12,000 Units of a Part Used in Its