Harvey automobiles uses a standard part in the manufacture of several of its trucks. the cost of producing 90,000 parts is $130,000, which includes fixed costs of $70,000 and variable costs of $60,000. the company can buy the part from an outside supplier for $3.50 per unit, and avoid 30% of the fixed costs.

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Business

Ingrid Santos

4 November, 10:11

Harvey automobiles uses a standard part in the manufacture of several of its trucks. the cost of producing 90,000 parts is $130,000, which includes fixed costs of $70,000 and variable costs of $60,000. the company can buy the part from an outside supplier for $3.50 per unit, and avoid 30% of the fixed costs.

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Mayra Molina · Answer 1

If Harvey decides to purchase the parts instead of manufacturing them, their total costs will increase by $164,000

Explanation:

currently Harvey's costs are:

variable costs = $70,000

fixed costs = $60,000

total $130,000

total cost per unit = $130,000 / 90,000 units = $1.44 per unit

if Harvey decide to outsource the production of the parts:

variable costs = 90,000 x $3.50 = $315,000

decrease in fixed costs = $70,000 x - 30% = - $21,000

total costs = $294,000

If Harvey decides to purchase the parts instead of manufacturing them, their total costs will increase by ⇒ $294,000 - $130,000 = $164,000