Galley Industries can produce 100 units of a necessary component part with the following costs: $$\begin{array} { l r }
\text { Direct Materials } & \$ 20,000 \
\text { Direct Labor } & 9,000 \
\text { Variable Overhead } & 21,000 \
\text { Fixed Overhead } & 8,000
\end{array}$$ If Galley Industries purchases the component externally $2000 of the fixed costs can be avoided.Below what external price for the 100 units would Galley choose to buy instead of make?

Question

Galley Industries can produce 100 units of a necessary component part with the following costs: $$\begin{array} { l r } 
\text { Direct Materials } & \$ 20,000 \
\text { Direct Labor } & 9,000 \
\text { Variable Overhead } & 21,000 \
\text { Fixed Overhead } & 8,000
\end{array}$$ If Galley Industries purchases the component externally $2000 of the fixed costs can be avoided.Below what external price for the 100 units would Galley choose to buy instead of make?

Quizplus · Accepted Answer

The total cost to produce internally is $58,000 ($20,000 + $9,000 + $21,000 + $8,000). If $2,000 of fixed costs can be avoided by purchasing externally, the relevant cost to compare is $56,000 ($58,000 - $2,000). Therefore, Galley would choose to buy if the external price is below $56,000.

Galley Industries Can Produce 100 Units of a Necessary Component