Question 27 Question text Harvey Automobiles uses a standard part in the manufac

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Question 27

Question text

Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of producing 40,000 parts is $120,000, which includes fixed costs of $60,000 and variable costs of $60,000. The company can buy the part from an outside supplier for $3.00 per unit, and avoid 30% of the fixed costs.

If Harvey Automobiles makes the part, how much will its operating income be?

Select one:

a. $42,000 greater than if the company bought the part

b. $42,000 less than if the company bought the part

c. $78,000 greater than if the company bought the part

d. $78,000 less than if the company bought the part

Question 28

Question text

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?

Select one:

a. $1.33

b. $2.26

c. $4.64

d. $2.33

Explanation / Answer

Harvey Automobiles Details Make   Buy No Of Parts                  40,000               40,000 Variable cost                  60,000            120,000 Fixed cost                  60,000               42,000 Total Cost               120,000            162,000 Difference is cost                    42,000 So if Harvey Makes the part , its net operating income will be $42,000 greater than is the company bought   the part. Cuyahoga Valley Bicycles Details Make   Buy No Of Parts                  40,000               40,000 Variable cost                  70,000 40000*k Fixed cost                  68,000               47,600 Total Cost               138,000               47,600 Assume the unit purchase cost of the part is k so that net operating income or total cost is same for both the options. so, 40000k+47600=138000 k=2.26 So the required unit cost of purchase= $                  2.26

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