Use the information below to answer the following question(s):
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:

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.
-If Andrew Corporation buys the part, what is the most Andrew Corporation can spend per unit so that their operating income remains the same as it is currently?

Question

Use the information below to answer the following question(s):
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:
  
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.
-If Andrew Corporation buys the part, what is the most Andrew Corporation can spend per unit so that their operating income remains the same as it is currently?

Quizplus · Accepted Answer

To determine the most Andrew Corporation can spend per unit so that their operating income remains the same, we need to find out the current cost per unit they are spending on the production of Part Z45.
Let's denote the current cost per unit as X.
Variable costs per unit = $2.10
Fixed costs per unit = $3.05
Total cost per unit = Variable cost per unit + fixed cost per unit
X = $2.10 + $3.05
X = $5.15
If Andrew Corporation buys from the outside supplier, they can purchase the part for $4.25 per unit and avoid 40% of their fixed costs, which is $1.22 per unit ($3.05 × 0.4).
Therefore, their new fixed cost per unit = $3.05 – $1.22 = $1.83
New total cost per unit = Variable cost per unit + new fixed cost per unit
New cost per unit = $2.10 + $1.83
New cost per unit = $3.93
To maintain the same operating income, the selling price should remain the same. Hence, Selling price per unit - Current cost per unit = Selling price per unit - new cost per unit
$5.15 - $3.93 = $4.25 - New cost per unit
$1.22 = $0.32 - New cost per unit
New cost per unit = $0.32 - $1.22
New cost per unit = $3.90
Therefore, the most Andrew Corporation can spend per unit so that their operating income remains the same is $3.90, which is closest to option D ($4.10).

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