Taylor Inc.manufactures 12,000 units of a part used in its production to manufacture guitars.The annual production activities related to this part are as follows: Best Guitars Inc.has offered to sell 12,000 units of the same part to Taylor for $22 per unit.If Taylor were to accept the offer,some of the facilities presently used to manufacture the part could be rented to a third party at an annual rental of $18,000.Moreover,$4 per unit of the fixed overhead applied to the part would be totally eliminated.
-In the decision to make or buy the part,what is the relevant fixed overhead for Taylor Inc.?
A)$30,000
B)$54,000
C)$84,000
D)$48,000

Question

Taylor Inc.manufactures 12,000 units of a part used in its production to manufacture guitars.The annual production activities related to this part are as follows:  Best Guitars Inc.has offered to sell 12,000 units of the same part to Taylor for $22 per unit.If Taylor were to accept the offer,some of the facilities presently used to manufacture the part could be rented to a third party at an annual rental of $18,000.Moreover,$4 per unit of the fixed overhead applied to the part would be totally eliminated.
-In the decision to make or buy the part,what is the relevant fixed overhead for Taylor Inc.?
A)$30,000 
B)$54,000 
C)$84,000 
D)$48,000

Quizplus · Accepted Answer

The relevant fixed overhead for Taylor Inc. is $48,000.

To calculate the relevant fixed overhead, we need to consider the fixed overhead that will be eliminated if Taylor decides to buy the part from Best Guitars Inc. According to the information given, $4 per unit of the fixed overhead applied to the part would be totally eliminated. Since Taylor manufactures 12,000 units of the part, the total fixed overhead that would be eliminated is:

$4 x 12,000 = $48,000

Therefore, if Taylor decides to buy the part from Best Guitars Inc., it would save $48,000 in fixed overhead costs.