Part Z45 Is a Part Used in the Production of Blenders

question 66

Multiple Choice

Part Z45 is a part used in the production of blenders at Andrew Corporation.The following costs and data relate to the production of Part Z45: $$\begin{array} { | l | c r | } \hline \text { Number of parts produced annually } & & 20,000 \\\hline \text { Fixed costs } & \$ & 40,000 \\\hline \text { Variable costs } & \mathbf { \$ } & 66,000 \\\hline \text { Total cost to produce } & \$ & 106,000 \\\hline\end{array}$$ Andrew Corporation can purchase the part from an outside supplier for $4.25 per unit.If they purchase from the outside supplier,40% of the fixed costs would be avoided.
-If Andrew Corporation buys the part,what is the most Andrew Corporation can spend per unit so that their operating income remains the same as it is currently?

• A)$5.70
• B)$1.50
• C)$1.65
• D)$4.10

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Definitions:

Marginal Cost

The production cost for one more unit of a product.

Marginal Cost Curve

A graphical representation showing how the cost of producing one additional unit of a good varies.

Average Total Cost

The per unit cost of production, computed by dividing the total cost of production by the total quantity of output.

Average Fixed Cost

The fixed costs of production (costs that do not change with the level of output) divided by the quantity of output produced.