Question

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

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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?

Answer 1

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