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 parts is $90,000. If DC Electronics buys the parts, they save 30% of the fixed costs ($33,000 * 0.30 = $9,900), so the remaining fixed costs are $23,100. The variable cost per unit is $57,000 / 30,000 = $1.90. To maintain the same operating income, the total cost of buying should not exceed the total cost of making. Therefore, the maximum cost per unit when buying is ($90,000 - $9,900) / 30,000 = $2.23.

DC Electronics Uses a Standard Part in the Manufacture of Several