Doro Fill Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
$$\begin{array} { | l | l | l | }
\hline \text { Volume } & 800 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 6 & \text { per unit } \
\hline \text { Fixed costs } & \$ 15,000 & \text { per month } \
\hline
\end{array}$$ A factory in Indonesia has offered to supply Doro Fill with ready-made units for a cost of $11 each.Assume that Doro Fill's fixed costs are unavoidable and that the company will not be able to use the excess capacity in any profitable manner.In order to maximize operating income,Doro Fill should not outsource.

Question

Doro Fill Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
 $$\begin{array} { | l | l | l | } 
\hline \text { Volume } & 800 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 6 & \text { per unit } \
\hline \text { Fixed costs } & \$ 15,000 & \text { per month } \
\hline
\end{array}$$ A factory in Indonesia has offered to supply Doro Fill with ready-made units for a cost of $11 each.Assume that Doro Fill's fixed costs are unavoidable and that the company will not be able to use the excess capacity in any profitable manner.In order to maximize operating income,Doro Fill should not outsource.

Quizplus · Accepted Answer

If Doro Fill outsources, the total cost would be $11 * 800 = $8,800. Keeping production in-house costs $6 * 800 + $15,000 = $19,800. Outsourcing reduces costs, but fixed costs are unavoidable, so in-house production is more expensive.

Doro Fill Company Fabricates Automobiles A Factory in Indonesia Has Offered to Supply Doro Fill