Question

Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of producing parts is ​, which includes fixed costs of and variable costs of . The company can buy the part from an outside supplier for 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 ​$ profit. If Harvey Automobiles makes the​ part, what will its operating income​ be?

Answer 1

Answer:

$26000 greater than if the company bought the part

Explanation:

The computation of the operating income in case of the making part is shown below:

In making 40,000 parts

The relevant cost is $60,000

In the case when the product is buyed from outsider

Purchase costs   ($3 × 40,000)   $120,000

Less - avoidable fixed cost ($70,000 × 30%)  ($21,000

Less; profit from the sale of another product ($13,000 )

Relevant cost to buy  $86,000

Now the difference of cost is

= $86,000 - $60,000

= $26,000