Bell's Shop Can Make 1,000 Units of a Necessary Component

question 31

Multiple Choice

Bell's Shop can make 1,000 units of a necessary component with the following costs: $\begin{array}{lr}\text { Direct Materials } & \$ 24,000 \\\text { Direct Labor } & 6,000 \\\text { Variable Overhead } & 3,000 \\\text { Fixed Overhead } & ?\end{array}$ The company can purchase the 1,000 units externally for $39,000. The unavoidable fixed costs are $2,000 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?

• A)$8,000
• B)$6,000
• C)$4,000
• D)Cannot be determined.

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Definitions:

Utility Function

A mathematical representation of how consumers rank different bundles of goods according to their levels of satisfaction.

Bliss Point

The optimal quantity of consumption where any further increase or decrease would lead to a less preferable situation for the consumer.

Absolute Value

the non-negative value of a number without regard to its sign, essentially the distance of a number from zero on the number line.

Convex Preferences

A consumer preference pattern indicating that mixtures or combinations of goods are preferred over individual goods, showing a preference for diversification.