wifty’s Shop can make 1000 units of a necessary component with the following costs: Direct Materials $28000 Direct Labor 6000 Variable Overhead 3000 Fixed Overhead ? The company can purchase the 1000 units externally for $43000. The unavoidable fixed costs are $2000 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?
Cost of buying = Direct Material + Direct labor + Variable overhead + Avoidable fixed costs
$43,000 = $28,000 + $6,000 + $3,000 + Avoidable fixed costs
$43,000 = $37,000 + Avoidable fixed costs
Avoidable fixed costs = $43,000 - $37,000
Avoidable fixed costs = $6,000
Fixed overhead costs of making = Avoidable fixed costs + Unavoidable fixed costs
Fixed overhead costs of making = $6,000 - $2,000
Fixed overhead costs of making = $4,000
So therefore, the fixed overhead costs of making the component is $4,000.
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