Armstrong Valley 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 $68,000 and variable costs of $70,000. The company can buy the part from an outside supplier for $3.50 per unit, and avoid 30% of the fixed costs. If Armstrong Valley Bicycles makes the part, how much will its operating income be?

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9 August, 13:03

Armstrong Valley 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 $68,000 and variable costs of $70,000. The company can buy the part from an outside supplier for $3.50 per unit, and avoid 30% of the fixed costs. If Armstrong Valley Bicycles makes the part, how much will its operating income be?

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Ryder Chang · Answer 1

It is cheaper to make the part.

Explanation:

Giving the following information:

The cost of producing 40,000 parts is $138,000, which includes fixed costs of $68,000 and variable costs of $70,000. The company can buy the part from an outside supplier for $3.50 per unit and avoid 30% of the fixed costs.

The cost of making the part is $138,000. That will be the cost in the income statement.

We can calculate the effect on income if they buy the part.

Buy:

Selling pirce = 3.5

Savings in fixed costs = (0.3*70,000) = 21,000

Total cost = 3.5*40,000 + 70,000 - 21,000 = $189,000

It is cheaper to make the part.