Blue Ridge Bicycles 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 Blue Ridge Bicycles makes the part, how much will its operating income be?
A)$88,400 less than if the company bought the part
B)$71,000 less than if the company bought the part
C)$88,400 greater than if the company bought the part
D)$71,000 greater than if the company bought the part

Question

Quizplus · Accepted Answer

If Blue Ridge Bicycles makes the part, the total cost is $140,000. If they buy the part, the cost is 43,000 parts * $3.80/part = $163,400. However, they can avoid 30% of the fixed costs if they buy the part, so they save 30% * $68,000 = $20,400. Therefore, the total cost if they buy the part is $163,400 - $20,400 = $143,000. Making the part saves $143,000 - $140,000 = $3,000, not accounting for operating income differences. The error in calculation led to incorrect options, as none directly reflect the correct calculation based on the provided data. The correct approach shows making the part is cheaper, but the options given do not accurately represent this calculation.

Blue Ridge Bicycles Uses a Standard Part in the Manufacture