Taylor Manufactures 12,000 Units of a part used in its production to manufacture

Question

Taylor 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:

Direct Materials, $24,000
Direct Labor, $66,000
Variable Overhead, $54,000
Fixed Overhead, $84,000

Best Guitars, Inc., has offered to sell 12,000 units of the same part to Taylor for $22 per Unti. 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 teh 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?

A) $30,000
B) $54,000
C) $84,000
D) $42,000

Explanation / Answer

Taylor's total production costs for 12,000 units are $216,000 or $18 per unit. If they buy the 12,000 units from Best Guitar they would spend $4/unit more or +$48,000 in added costs. In the process they would save $4/unit in fixed overhead or -$48,000, leaving a $36,000 balance in fixed overhead and that does not match any of your answer choices. But I do not believe that ceasing production of the part would affect the fixed, but rather only the variable overhead and reduce that cost by $48,000 and that also does not match any of your possible answers either. Based on the assumption that the wrong label was used in your problem, I would say the fixed overhead stays at $84,000 and the answer is C. But I can say for sure that the extra cost of buying that part from from Best Guitars is offset by the savings in the fixed or variable overhead. Therefore, Taylor should buy that part from Best Guitar, because they would have $18,000 of new rental income from the vacated manufacturing space.

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