Problem
Taylor manufactures 12,000 units of a part used in its production to manufacture guitars. The annual production activities related to this part are as follows:
Direct materials, $24,000
Direct labor, $66,000
Variable overhead, $54,000
Fixed overhead, $84,000
Best Guitars, Inc., has offered to sell 12,000 units of the same part to Taylor for $22 per unit. If Taylor were to accept the offer, some of the facilities presently used to manufacture the part could be rented to a third party at an annual rental of $18,000. Moreover, $5 per unit of the fixed overhead applied to the part would be totally eliminated.
1. In the decision to make or buy the part, what is the relevant fixed overhead?
2. What should Taylor's decision be, and what is the total cost savings that would result?