Harvey Automobiles Uses a Standard Part in the Manufacture of Several

question 232

Multiple Choice

Harvey Automobiles uses a standard part in the manufacture of several of its trucks. The cost of producing 90,000 parts is $130,000, which includes fixed costs of $70,000 and variable costs of $60,000. 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 $350,000 profit. If Harvey Automobiles makes the part, what will its operating income be?

• A)$63,000 greater than if the company bought the part
• B)$220,000 less than if the company bought the part
• C)$220,000 greater than if the company bought the part
• D)$350,000 greater than if the company bought the part

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Definitions:

Legal Entity

An individual or organization with legal rights and obligations, including the ability to enter into contracts, sue, and be sued.

Cumulative Preferred Stock

A type of preferred stock that has a provision that requires the company to pay all dividends, including those that have been skipped, before any dividends can be distributed to common stockholders.

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Individuals or entities that own shares of a company's common stock, granting them rights to dividends and voting in shareholder meetings.

Dividends

The portion of a company's earnings distributed to shareholders, usually in the form of cash or additional stock.