Ultimate Travel Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
$$\begin{array} { | l | l | l | }
\hline \text { Volume } & 1,000 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 7 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000 & \text { per month } \
\hline
\end{array}$$ A factory in India has offered to supply Ultimate Travel with ready-made units for a cost of $8 each.Assume that Ultimate Travel's fixed costs are unavoidable,but the company could use the vacated production facilities to earn an additional $5,000 of profit per month.In order to maximize operating income,Ultimate Travel should outsource.

Question

Ultimate Travel Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
 $$\begin{array} { | l | l | l | } 
\hline \text { Volume } & 1,000 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 7 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000 & \text { per month } \
\hline
\end{array}$$ A factory in India has offered to supply Ultimate Travel with ready-made units for a cost of $8 each.Assume that Ultimate Travel's fixed costs are unavoidable,but the company could use the vacated production facilities to earn an additional $5,000 of profit per month.In order to maximize operating income,Ultimate Travel should outsource.

Quizplus · Accepted Answer

Outsourcing would cost $8,000 (1,000 units x $8) and provide an additional $5,000 profit, totaling $13,000 in costs and lost profits. In-house production costs $20,000 ($7,000 variable + $13,000 fixed), so outsourcing saves $2,000.

Ultimate Travel Company Fabricates Automobiles A Factory in India Has Offered to Supply Ultimate Travel