DC Electronics uses a standard part in the manufacture of several of its radios. The cost of producing 30,000 parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy the part from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs. If DC Electronics buys the part, what is the most DC Electronics can spend per unit so that operating income equals the operating income from making the part?

Question

Quizplus · Accepted Answer

The total cost of making the part is $90,000 for 30,000 units, which is $3.00 per unit. If they buy the part, they save 30% of the fixed costs ($33,000 * 0.30 = $9,900), so the remaining fixed costs are $23,100. The variable cost is $57,000, which is $1.90 per unit. The total cost of buying the part is $2.50 per unit plus the remaining fixed costs spread over 30,000 units, which is $23,100 / 30,000 = $0.77 per unit. Therefore, the maximum cost per unit to maintain the same operating income is $1.90 + $0.77 = $2.67. However, since the question asks for the maximum they can spend per unit, the correct answer is $2.23, which is the cost of buying the part minus the savings from reduced fixed costs.

DC Electronics Uses a Standard Part in the Manufacture of Several