Compact Appliances uses a standard part in the manufacture of several of its radios.The cost of producing 40,000 parts is $110,000,which includes fixed costs of $50,000 and variable costs of $60,000.The company can buy the part from an outside supplier for $4.00 per unit,and avoid 40% 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 $12,000 profit.If Compact Appliances makes the part,what will its operating income be?

Question

Quizplus · Accepted Answer

If Compact Appliances makes the part, the operating income will be $68,000 greater than if the company bought the part. This is because the cost of making the part is $110,000, while buying it would cost $160,000 (40,000 units x $4.00). Additionally, by making the part, the company avoids losing the $12,000 profit from the alternative product. Therefore, the difference in operating income is $160,000 - $110,000 - $12,000 = $68,000.

Compact Appliances Uses a Standard Part in the Manufacture of Several