Blue Ridge Bicycles uses a standard part in the manufacture of several of its bikes. The cost of producing 40 comma 000 parts is $ 138 comma 000 , which includes fixed costs of $ 69 comma 000 and variable costs of $ 69 comma 000. The company can buy the part from an outside supplier for $ 3.70 per unit, and avoid 30% of the fixed costs. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $ 16 comma 000 profit. If Blue Ridge Bicycles makes the part, what will its operating income be?

Question

Sophie Le

Business

28 February, 15:31

Blue Ridge Bicycles uses a standard part in the manufacture of several of its bikes. The cost of producing 40 comma 000 parts is $ 138 comma 000 , which includes fixed costs of $ 69 comma 000 and variable costs of $ 69 comma 000. The company can buy the part from an outside supplier for $ 3.70 per unit, and avoid 30% of the fixed costs. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $ 16 comma 000 profit. If Blue Ridge Bicycles makes the part, what will its operating income be?

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Total cost = $105,700

Explanation:

Giving the following information:

The cost of producing 40,000 parts is:

fixed costs = $69,000

variable costs = $69,000.

Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $16,000 profit

We need to calculate the total cost of making the part compared to buying it. We don't have enough information to calculate the operating income:

Total cost = total variable cost + avoidable fixed cost + opportunity cost

Total cost = 69,000 + (69,000*0.30) + 16,000 = $105,700

Just for information purposes, we will calculate the total cost of buying the part:

Buying = 40,000 units * 3.7 = $148,000