Bell\'s Shop can make 1,000 units of a necessary component with the following co

Question

Bell's Shop can make 1,000 units of a necessary component with the following costs:
Direct Materials $72,000
Direct Labor 18,000
Variable Overhead 9,000
Fixed Overhead ?

The company can purchase the 1,000 units externally for $117,000. The avoidable fixed costs are $6,000 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?



A $24,000



B $12,000



C Cannot be determined.



D $18,000

Explanation / Answer

total cost if it purchases externally=117000
difference in cost of making ang buying=117000-72000-18000-9000=18000
so fixed cost is 18000 but avoidable fixed costs are 6000 if company buys the product
so total fixed cost is 18000+6000=$24000

A $24,000

B $12,000

C Cannot be determined.

D $18,000

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