Part Z45 is a part used in the production of blenders at Andrew Corporation.The following costs and data relate to the production of Part Z45: $$\begin{array} { | l | c c | }
\hline \text { Number of parts produced annually } & & 20,000 \
\hline \text { Fixed costs } & \$ & 40,000 \
\hline \text { Variable costs } & \mathbf { \$ } & 66,000 \
\hline \text { Total cost to produce } & \$ & 106,000 \
\hline
\end{array}$$ Andrew Corporation can purchase the part from an outside supplier for $4.25 per unit.If they purchase from the outside supplier,40% of the fixed costs would be avoided.
-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 $2,000 profit.If Andrew Corporation makes the part,what will its operating income be?

Question

Part Z45 is a part used in the production of blenders at Andrew Corporation.The following costs and data relate to the production of Part Z45: $$\begin{array} { | l | c c | } 
\hline \text { Number of parts produced annually } & & 20,000 \
\hline \text { Fixed costs } & \$ & 40,000 \
\hline \text { Variable costs } & \mathbf { \$ } & 66,000 \
\hline \text { Total cost to produce } & \$ & 106,000 \
\hline
\end{array}$$ Andrew Corporation can purchase the part from an outside supplier for $4.25 per unit.If they purchase from the outside supplier,40% of the fixed costs would be avoided.
-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 $2,000 profit.If Andrew Corporation makes the part,what will its operating income be?

Quizplus · Accepted Answer

If Andrew Corporation makes the part, its operating income will be $1,000 greater than if the company bought the part. This is because the company will save $40,000 in fixed costs by purchasing the part from an outside supplier, but it will also lose $2,000 in profit from the other product that could be manufactured in the freed-up factory space. Therefore, the net savings from purchasing the part will be $40,000 - $2,000 = $38,000. Since the company's operating income is equal to its total revenue minus its total costs, and the total revenue will be the same regardless of whether the company makes or buys the part, the company's operating income will be $38,000 greater if it purchases the part.

Part Z45 Is a Part Used in the Production of Blenders