Question

Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of producing 60,000 parts is $160,000, which includes fixed costs of $50,000 and variable costs of $110,000. The company can buy the part from an outside supplier for $3.00 per unit, and avoid 30% of the fixed costs. If Harvey Automobiles makes the part, how much will its operating income be?

Answer 1

	Manufacturing	Buying
Purchase cost from outside suppliers (60,000 parts x $3 per parts)		$1,80,000
Variable Costs	$1,10,000
Fixed Costs	$50,000	$35,000
Net ncome	$1,60,000	$2,15,000

* Fixed Cost – Buying = $50,000 x 0.70 =

Conclusion

If Harvey Automobiles manufactures the parts, its operating income will be $55,000 greater than if the company bought the parts from the outside supplier ($2,15,000 - $1,60,000)