Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of producing 60,000 parts is $160,000, which includes fixed costs of $50,000 and variable costs of $110,000. 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?
A)$55,000 greater than if the company bought the part
B)$55,000 less than if the company bought the part
C)$145,000 greater than if the company bought the part
D)$145,000 less than if the company bought the part

Question

Quizplus · Accepted Answer

If Harvey makes the part, the total cost is $160,000. If Harvey buys the part, the cost is $3.00 per unit for 60,000 units = $180,000, but they save 30% of fixed costs ($50,000 * 30% = $15,000), making the total cost $165,000 ($180,000 - $15,000). Therefore, making the part saves $5,000 ($165,000 - $160,000), not accounting for the difference in operating income as stated. The correct interpretation should focus on comparing the costs directly, which shows making the part is cheaper by $5,000, not leading to the options provided. The explanation aimed to clarify the cost comparison, but the options given do not match this calculation.

Harvey Automobiles Uses a Standard Part in the Manufacture of Several