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?

A) $71,000 less than if the company bought the part

B) $88,400 greater than if the company bought the part

C) $71,000 greater than if the company bought the part

D)$88,400 less than if the company bought the part

Answer 1

Solution :

Calculation of Total cost of producing the Standard Part inhouse:

As per the information given in the question

Best Bicycles Inc. produces 43,000 parts

Fixed costs = $68,000 ; Variable costs = $72,000 ;

Thus the total cost of producing the Standard part inhouse

= Fixed costs + Variable costs

= $ 68,000 + $ 72,000

= $ 140,000

Thus the Total cost of producing the Standard Part in house = $ 140,000

Calculation of Total cost of purchasing the Standard Part from outside :

As per the information given in the question

Best Bicycles Inc. produces 43,000 parts

Cost of purchase of the standard part from outside supplier = $ 3.80 per unit

If the standard part is purchased from outside, Fixed costs can be reduced by 30 %.

Thus Fixed costs = $68,000 * ( 1 – 30 % ) = $ 68,000 * 0.7 = $ 47,600

Thus the total cost of purchasing the Standard part form an outside supplier

= (No. of units of the standard part * Cost of purchase of the standard part from outside supplier ) + Fixed costs

= ( $ 3.80 * 43,000 ) + $ 47,600

= $ 163,400 + $ 47,600

= $ 211,000

Thus the Total cost of purchasing the Standard part form an outside supplier = $ 211,000

If Best Bicycles makes the part then its savings shall be

= Total cost of purchasing the Standard part form an outside supplier - Total cost of producing the Standard Part in house

= $ 211,000 - $ 140,000

= $ 71,000

Thus, if Best Bicycles makes the part, its operating income be $ 71,000 greater than if the company bought the part

The solution is Option C) $ 71,000 greater than if the company bought the part.