Blue Ridge Bicycles uses a standard part in the manufacture of several of its bikes. The cost of producing 42,000 parts is $138,000, which includes fixed costs of $68,000 and variable costs of $70,000. The company can buy the part from an outside supplier for $3.50 per unit, and avoid 30% of the fixed costs. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $15,000 profit. If Blue Ridge Bicycles makes the part, what will its operating income be?
A)$41,600 greater than if the company bought the part
B)$41,600 less than if the company bought the part
C)$71,600 greater than if the company bought the part
D)$179,600 greater than if the company bought the part

Question

Quizplus · Accepted Answer

If Blue Ridge Bicycles makes the part, the operating income will be $41,600 greater than if the company bought the part. This is calculated by comparing the total cost of making the part ($138,000) with the cost of buying the part ($147,000) and considering the additional profit from using the freed-up space ($15,000).

Blue Ridge Bicycles Uses a Standard Part in the Manufacture