Question

Best Bicycles Inc uses a standard part in the manufacture of several of its bikes. The cost of producing 43,000 parts is $140,000, which includes fixed costs of $68,000 and variable costs of $72,000. The company can buy the part from an outside supplier for $3.80 per unit, and avoid 30% of the fixed costs. If Best Bicycles makes the part, how much will its operating income be?

Answer 1

Answer:

It is more convenient to produce in house, so the  Best Bicycles makes the part, its operating income will be $140,000  

Explanation:

Given the information:

The cost of producing 43,000 parts is $140,000 :

• fixed costs of $68,000
• variable costs of $72,000

outside supplier for $3.80 per unit

avoid 30% of the fixed costs

As we know, the total costs if company bought is as following;

= Cost of production × Outside supplier per unit) + (Fixed cost × Remaining percentage)

= (43,000*$3.80 per unit)  + ($68,000*(100% - 30%))

= $163,400 + $47,600

= $211,000

=> the loss in income if the company decided to buy:

= the total costs if company bought - The cost of production

= $211,000 - $140,000

= $71,000

It is more convenient to produce in house, so the  Best Bicycles makes the part, its operating income will be $140,000