Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: $$\begin{array} { l r }
\text { Direct Materials } & \$ 120,000 \
\text { Direct Labor } & 25,000 \
\text { Variable Overhead } & 45,000 \
\text { Fixed Overhead } & 30,000
\end{array}$$ If Tex's Manufacturing Company purchases the component externally $20000 of the fixed costs can be avoided.At what external price for the 100 units is the company indifferent between making or buying?

Question

Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: $$\begin{array} { l r } 
\text { Direct Materials } & \$ 120,000 \
\text { Direct Labor } & 25,000 \
\text { Variable Overhead } & 45,000 \
\text { Fixed Overhead } & 30,000
\end{array}$$ If Tex's Manufacturing Company purchases the component externally $20000 of the fixed costs can be avoided.At what external price for the 100 units is the company indifferent between making or buying?

Quizplus · Accepted Answer

The total cost of making the component is $220,000. If purchased, $20,000 of fixed costs are avoided, making the relevant cost $200,000. Thus, the company is indifferent at an external price of $210,000.

Tex's Manufacturing Company Can Make 100 Units of a Necessary