Blue Ridge Bicycles uses a standard part in the manufacture of several of its bi

Question

Blue Ridge Bicycles uses a standard part in the manufacture of several of its bikes. The cost of producing 42,000 parts is $140,000, which includes fixed costs of $68,000 and variable costs of $72,000. The company can buy the part from an outside supplier for$350 per unit and a d 30%, of h xed cos s. 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 $15,000 profit. If Blue Ridge Bicycles makes the part, what will its operating income be? O A. O B. ° C. O D. $179,600 greater than if the company bought the part $69,600 greater than if the company bought the part $39,600 less than if the company bought the part $39,600 greater than if the company bought the part

Explanation / Answer

Correct answer is: D. $39,600 greater than if company bought the part Under Make option: Variable cost = $     72,000 Cost of making = $     72,000 Under Buy option: Purchase cost (42,000 units X $3.50) = $ 1,47,000 Less: Savings in fixed cost ($68,000 X 30%) = $     20,400 Less: Sale of another material on freeing up space (opportunity gain) = $     15,000 Cost of buying $ 1,11,600 Operating income, if Blue Ridges makes the part ($111600-$72000) = $     39,600 Therefore, if Blue ridges bicycles makes the part its operating income will be $39,600 greater than if company bought the part Note: Fixed cost can be ignored as it is considered to be irrelevant cost but savings in fixed cost shall be deducted from the total cost as it will impact the decision.

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