Part Z45 Is a Part Used in the Production of Blenders

question 85

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: $$\begin{array} { | l | c c | } \hline \text { Number of parts produced annually } & & 20,000 \\\hline \text { Fixed costs } & \$ & 40,000 \\\hline \text { Variable costs } & \mathbf { \$ } & 66,000 \\\hline \text { Total cost to produce } & \$ & 106,000 \\\hline\end{array}$$ 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.
-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 $2,000 profit.If Andrew Corporation makes the part,what will its operating income be?

• A)$1,000 less than if the company bought the part
• B)$5,000 greater than if the company bought the part
• C)$1,000 greater than if the company bought the part
• D)$107,000 greater than if the company bought the part

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Definitions:

Opportunity Cost

The expense related to overlooking the next in line preferable option in the course of decision-making.

Opportunity Cost

The cost of forgoing the next best alternative when making a decision, effectively representing the benefits you miss out on choosing one option over another.

Inefficient Outcome

A result or situation in which resources are not utilized in the best possible manner, leading to potential wastage or loss.

Production Possibilities Frontier

A curve depicting all maximum output possibilities for two or more goods, given a set of inputs, representing the trade-off between different choices.