Question

Blue Ridge Bicycles uses a standard part in the manufacture of several of its bikes. The cost of producing​ 45,000 parts is​ $142,000, which includes fixed costs of​ $70,000 and variable costs of​ $72,000. By outsourcing the​ part, the company can avoid​ 30% of the fixed costs. If Blue Ridge Bicycles buys the​ part, what is the most Blue Ridge Bicycles can spend per unit so that operating income equals the operating income from making the​ part?

Answer 1

Answer:

$2.07 per unit

Explanation:

Currently 45,000 units produced

total cost= $72,000 (variable) + $70,000 (fixed) = $142,000

average total cost per unit = $142,000 / 45,000 units = $3.16 per unit

if the company outsources the production of the part:

total cost = $72,000 + ($70,000 x 30%) = $72,000 + $21,000 = $93,000

average total cost per unit = $93,000 / 45,000 units = $2.07 per unit

if Blue Ridge spends more than $2.07 per unit, it will be spending more money by outsourcing the part than by producing it.

e.g. $2.10 per unit

total costs = ($2.10 x 45,000) + ($70,000 x 70%) = $94,500 + $49,000 = $143,500 which is higher than $142,000.