37. Harvey Automobiles uses a standard part in the manufacture of several of its

Question

37. Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of producing 90,000 parts is $120,000, which includes fixed costs of $40,000 and variable costs of $80.000 The company can buy the part from an outside supplier for $3.30 per unit, and avoid 30% of the fixed costs.If Harvey Automobiles makes the part, how much will its operating income be? A.$269,000 greater than if the company bought the part B. $269,000 less than if the company bought the part C.$205,000 greater than if the company bought the part D.$205,000 less than if the company bought the part 38. Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of producing 50,000 parts is $170,000, which includes fixed costs of $80,000 and variable costs of $90,000. By outsourcing the part, the company can avoid 70% of the fixed costs. If Harvey Automobiles buys the part, what is the most Harvey Automobiles can spend per unit so that operating income equals the operating income from making the part? A.$3.88 B.$2.92 C.$3.40 D.$1.60

Explanation / Answer

Question 37:

Since fixed cost is irrelevant in decision making the cost of Manufacturing 90000 units = 80000

The cost of purchasing 90000 units = 90000 x 3.3 = 297000 and it results in savings of fixed costs to the extent of 30% i.e., 40000 x 30% = 12000. So the net cost of purchasing = 297000 - 12000 = 285000

Since the cost of purchasing is 205000 more than that of making the operating income will be $205000 greater than if the company had bought the part.

So the answer is Option C.

Question 38:

Operating income should be equal in both alternatives. So the cost incurred must be the same.

Cost to be incurred if made = 90000. The fixed costs is not relevant because it is to be incuured in any alternative.

Let a unit be outsourced for $"x". When outsourced we have a savings in fixed costs @70%.

Cost if outsourced = 50000(x) - 80000 x 70% = 50000x - 56000

Equating both alternatives:

90000 = 50000x - 56000

90000+56000 = 50000x

50000x = 146000

x = 146000/50000

x = $2.92

So the answer is Option B

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