February 28, 2015

Homework Help: accounting

Posted by Pikaju on Wednesday, March 18, 2009 at 8:07pm.

Looking at this question and not sure why fixed cost is 2,000 and not 6,000.

Galley Industries can produce 100 units of necessary component parts with the following costs:

Direct Materials $20,000
Direct Labor 9,000
Variable Overhead 21,000
Fixed Overhead 8,000

If Galley Industries purchases the component externally, $2,000 of the fixed costs can be avoided. Below what external price for the 100 units would Galley choose to buy instead of make?

The answer is $52,000.

I guess from trying to figure out why it's 52,000 I would assume the breakdown is:

Direct material 20,000
direct labor 9,000
variable overhead 21,000
fixed overhead 2,000

now, if 2,000 can be avoided, why is fixed not 6,000?

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