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?

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 :

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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