Galley Industries can produce 500 units of a necessary component part with the following costs: $$\begin{array} { l r }
\text { Direct Materials } & \$ 75,000 \
\text { Direct Labour } & 20,000 \
\text { Variable Overhead } & 60,000 \
\text { Fixed Overhead } & 10,000
\end{array}$$ If Galley Industries purchases the component externally, $3,000 of the fixed costs can be avoided.Below what external price for the 500 units would Galley choose to buy instead of make?

Question

Galley Industries can produce 500 units of a necessary component part with the following costs: $$\begin{array} { l r } 
\text { Direct Materials } & \$ 75,000 \
\text { Direct Labour } & 20,000 \
\text { Variable Overhead } & 60,000 \
\text { Fixed Overhead } & 10,000
\end{array}$$ If Galley Industries purchases the component externally, $3,000 of the fixed costs can be avoided.Below what external price for the 500 units would Galley choose to buy instead of make?

Quizplus · Accepted Answer

If Galley Industries purchases the component externally, $3,000 of the fixed costs can be avoided. So, the relevant costs of making the component are:Direct Materials $75,000Direct Labour $20,000Variable Overhead $60,000Fixed Overhead $7,000 ($10,000 - $3,000)Total $162,000Galley Industries would choose to buy the component externally if the external price is less than $162,000.

Galley Industries Can Produce 500 Units of a Necessary Component