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15 April, 08:55

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?

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  1. 15 April, 11:48
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    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
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