Harvey Automobiles uses a standard part in the manufacture of several of its trucks.The cost of producing 40,000 parts is $120,000,which includes fixed costs of $60,000 and variable costs of $60,000.By outsourcing the part,the company can avoid 30% of the fixed costs.
If Harvey Automobiles buys the part,what is the most Harvey Automobiles can spend per unit so that operating income equals the operating income from making the part?

Question

Quizplus · Accepted Answer

B)
Cost to Build
Variable Costs $60,000
Fixed Costs 60,000
Total $120,000
Less Unavoidable Fixed Cost 42,000
Adjusted Cost of part 78,000 Divided by 40,000 = $1.95

Harvey Automobiles Uses a Standard Part in the Manufacture of Several