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 makes the part, how much will its operating income be?

Question

Quizplus · Accepted Answer

If DC Electronics makes the part, the total cost is $90,000. If they buy the part, the cost is $75,750 ($75,000 for the parts and $9,900 for the remaining fixed costs). Therefore, making the part results in an operating income that is $8,100 greater.

DC Electronics Uses a Standard Part in the Manufacture of Several