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?
Your right, the answer is $6,000.. Wiley has made a dumb mistake.
Chapter 7:
Question 13
Galley Industries can produce 100 units of a necessary component part with the following costs:
Direct Materials
$30,000
Direct Labour
13,000
Variable Overhead
32,000
Fixed Overhead
12,000
If Galley Industries purchases the component externally, $5,000 of the fixed costs can be avoided. Below what external price for the 100 units would Galley choose to buy instead of make?
$80,000
$60,000
$75,000
$84,000
Based on the given information, the total fixed overhead cost is $8,000. However, if Galley Industries purchases the component externally, $2,000 of the fixed costs can be avoided. Therefore, the fixed overhead cost to be considered when determining the external price is $2,000.
The breakdown of costs for the 100 units, if Galley Industries purchases externally, would be as follows:
Direct Materials $20,000
Direct Labor $9,000
Variable Overhead $21,000
Fixed Overhead $2,000
Therefore, the total cost of purchasing externally would be:
$20,000 (Direct Materials) + $9,000 (Direct Labor) + $21,000 (Variable Overhead) + $2,000 (Fixed Overhead) = $52,000
Hence, the external price for the 100 units would be $52,000.
To determine why the fixed cost is $2,000 instead of $6,000, we need to understand the concept of fixed costs and how they are affected in this scenario.
Fixed costs are expenses that do not vary with the level of production or the number of units produced. In this case, the fixed overhead cost is given as $8,000. However, if Galley Industries decides to purchase the component externally instead of producing it, $2,000 of the fixed costs can be avoided.
This means that only $2,000 of the $8,000 fixed overhead cost is considered avoidable when purchasing the component externally. The remaining $6,000 of fixed overhead costs are unavoidable and must be incurred whether the component is produced internally or purchased externally.
To determine the external price at which Galley Industries would choose to buy instead of make, we need to calculate the total cost of producing the component internally and compare it with the external price.
The total cost of producing the component internally can be calculated as follows:
Direct Materials: $20,000
Direct Labor: $9,000
Variable Overhead: $21,000
Fixed Overhead (unavoidable): $6,000
Total cost of producing internally = Direct Materials + Direct Labor + Variable Overhead + Fixed Overhead (unavoidable)
= $20,000 + $9,000 + $21,000 + $6,000
= $56,000
Now that we have the total cost of producing internally, we compare it with the external price. If the external price is less than the total cost of producing internally, it would be more cost-effective for Galley Industries to buy the component externally.
In this case, the external price at which Galley Industries would choose to buy instead of make is given as $52,000. Since $52,000 is less than the calculated total cost of producing internally ($56,000), Galley Industries would choose to buy the component externally for $52,000, thereby avoiding $2,000 of the fixed costs.
To summarize, the fixed overhead costs are divided into avoidable and unavoidable portions. In this scenario, only $2,000 of the fixed costs can be avoided when purchasing the component externally, while the remaining $6,000 of fixed costs are unavoidable. Therefore, the fixed cost is $2,000 and not $6,000.