Question

Fischer Company uses 12,000 units of a part in its production process. The costs to make a part are: direct material, $15; direct labor, $27; variable overhead, $15; and applied fixed overhead, $32. Heath has received a quote of $60 from a potential supplier for this part. If Fischer buys the part, 75 percent of the applied fixed overhead would continue. Fischer Company would be better off by

Answer 1

Answer: $60,000

Explanation:

Total cost of producing the good internally:

= No. of units * (Direct material + Direct labor + Variable overhead + Applied fixed overhead)

= 12,000 * (15 + 27 + 15 + 32)

= $‭1,068,000‬

If the good is acquired externally for $60, they would still incur 75% of the applied fixed overhead:

= 12,000 * [ 60 + (75% * 32)]

= $‭1,008,000‬

If Fischer received from the supplier, they would save:

= 1,068,000 - 1,008,000

= $60,000

Fischer Company would be better off by $60,000 to buy the part.