Question

Blue Ridge Bicycles uses a standard part in the manufacture of several of its bikes. The cost of producing 40,000 parts is $138,000, which includes fixed costs of $73,000 and variable costs of $65,000. By outsourcing the part, the company can avoid 30% of the fixed costs. If Blue Ridge Bicycles buys the part, what is the most Blue Ridge Bicycles can spend per unit so that operating income equals the operating income from making the part

Answer 1

Answer:

$2.17

Explanation:

The computation of maximum amount per unit is shown below:-

First we need to compute the avoidable fixed coast and total cost of making to reach maximum amount per unit

Avoidable fixed cost = Fixed cost × Fixes cost percentage

= $73,000 × 30%

= $21,900

Total cost of making = Variable cost + Avoidable fixed cost

= $65,000 + $21,900

= $86,900

Maximum amount per unit = Total cost of making ÷ Producing cost

= $86,900 ÷ 40,000

= $2.17

Therefore, for computing the maximum amount per unit we simply divide the total cost of making by producing cost.