Bell's Shop can make 1,000 units of a necessary component with the following costs:
Direct Materials $72,000
Direct Labor 18,000
Variable Overhead 9,000
Fixed Overhead ?
The company can purchase the 1,000 units externally for $117,000. The avoidable fixed costs are $6,000 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) $24,000
B) $18,000
C) $12,000
D) Cannot be determined.

Question

Quizplus · Accepted Answer

The total cost of making the component is equal to the cost of buying it externally, which is $117,000. The sum of direct materials, direct labor, and variable overhead is $99,000. Therefore, the fixed overhead must be $18,000 to make the total cost $117,000. Since $6,000 of fixed costs are avoidable, the total fixed overhead is $24,000.

Bell's Shop Can Make 1,000 Units of a Necessary Component