Bell's Shop can make 1000 units of a necessary component with the following costs: $$\begin{array} { l r }
\text { Direct Materials } & \$ 24,000 \
\text { Direct Labor } & 6,000 \
\text { Variable Overhead } & 3,000 \
\text { Fixed Overhead } & ?
\end{array}$$ The company can purchase the 1000 units externally for $39000.The unavoidable fixed costs are $2000 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?

Question

Bell's Shop can make 1000 units of a necessary component with the following costs: $$\begin{array} { l r } 
\text { Direct Materials } & \$ 24,000 \
\text { Direct Labor } & 6,000 \
\text { Variable Overhead } & 3,000 \
\text { Fixed Overhead } & ?
\end{array}$$ The company can purchase the 1000 units externally for $39000.The unavoidable fixed costs are $2000 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?

Quizplus · Accepted Answer

The fixed overhead costs of making the component are $8000. This is because the total cost of making the component is $33000 (direct materials + direct labor + variable overhead + fixed overhead), and the total cost of purchasing the component is $39000. Since the company is indifferent between making or buying the part, the fixed overhead costs must be $8000 ($39000 - $33000).

Bell's Shop Can Make 1000 Units of a Necessary Component