Johnson Company manufactures widgets. Old Ham Company has approached Jones with a proposal to sell the company one of the components used to make widgets at a price of $100,000 for 50,000 units. Jones is currently making these components in its own factory.
The following costs are associated with this part of the process when 50,000 units are produced:
Direct material $44,000
Direct labor 20,000
Manufacturing overhead 60,000
Total $124,000
The manufacturing overhead consists of $32,000 of costs that will be eliminated if the components are no longer produced by Jones. The remaining manufacturing overhead will continue whether or not Jones makes the components.
What is the amount of avoidable costs if Jones buys rather than makes the components?