Harvey Automobiles uses a standard part in the manufacture of several of its tru

Question

Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of producing 50,000 parts is $170,000, which includes fixed costs of $70,000 and variable costs of $100,000. The company can buy the part from an outside supplier for $3.50 per unit, and avoid 30% 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 $17,000 profit If Harvey Automobiles makes the part, what will its operating income be? O A. $207,000 greater than if the company bought the part OB. $37,000 greater than if the company bought the part ° C. S66.000 greater than if the company bought the part O D. $37,000 less than if the company bought the part Click to select your answer

Explanation / Answer

Q1. Answer is B. $ 37000 greater than if company bought the part. Explanation: Incremental analysis: Cost of incurred in purchasing (50000 units*3.50) 175000 Less: Profit generated from idle space 17000 Nnet cost incurred -158000 Less: Saving n cost: Variable cost saving 100,000 Fixed cost saaving (70,000*30%) 21000 Net decreasse in income -37000 Q2. Answer is C. $72700 greaterr than if parts bought Explanation: Incremental analysis: Cost of incurred in purchasing (43000 units*3.80) -163400 Less: Saving in cost Variable cost saving 70,000 Fixed cost saaving (69,000*30%) 20700 Net decrease in profit -72700 Q3. Answer is C. Increase by $125000 Explanation: Income statement after discontinuance: Ssales revenue of cat food 600,000 Less: variable cost 300,000 Contribution margin 300,000 Fixed cost 102,000 Operating income 198,000 Original net income 73,000 Increasse in net income 125,000

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