Cuyahoga 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. By outsourcing the part, the company can avoid 30% of the fixed costs.

If Cuyahoga Valley Bicycles buys the part, what is the most Cuyahoga Valley Bicycles can spend per unit so that operating income equals the operating income from making the part?

a. $1.33

b. $2.26

c. $4.64

d. $2.33

b. $2.26

Explanation:

For computing the spending per unit, first we have to required the following calculations which are shown below:

Since it is given that for 40,000 parts, the production cost is $138,000

And for outsourcing the products, it avoid 30% of fixed cost i. e 70% is to be considered which is

= $68,000 * 70%

= $47,600

And for computing the per unit we equate the total cost

Making cost = Buying cost

$138,000 = Fixed cost + variable cost

$138,000 = $47,600 + variable cost

So, the variable cost is $90,400

And the spending per unit is

= $90,400 : 40,000 parts

= $2.26 per part