Walsh Automobile Company fabricates automobiles.Each vehicle includes one airflow sensor,which is currently made in-house.Details of the airflow sensor fabrication are as follows: $$\begin{array} { | l | r | l | }
\hline \text { Volume } & 700 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000 & \text { per month } \
\hline
\end{array}$$ A Japanese factory has offered to supply Walsh with ready-made units for a cost of $15 per sensor.Assume that Walsh's fixed costs could be reduced by $3000 if it outsources and that Walsh will not be able to use the excess capacity in any profitable manner.If Walsh decides to outsource,monthly operating income will ________.

Question

Walsh Automobile Company fabricates automobiles.Each vehicle includes one airflow sensor,which is currently made in-house.Details of the airflow sensor fabrication are as follows: $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 700 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000 & \text { per month } \
\hline
\end{array}$$ A Japanese factory has offered to supply Walsh with ready-made units for a cost of $15 per sensor.Assume that Walsh's fixed costs could be reduced by $3000 if it outsources and that Walsh will not be able to use the excess capacity in any profitable manner.If Walsh decides to outsource,monthly operating income will ________.

Quizplus · Accepted Answer

The cost of making in-house is $18,600 ($8*700 + $13,000). Outsourcing costs $10,500 ($15*700) with reduced fixed costs of $10,000 ($13,000 - $3,000). The total cost when outsourcing is $20,500, leading to a decrease in operating income by $1,900 ($20,500 - $18,600).

Walsh Automobile Company Fabricates Automobiles A Japanese Factory Has Offered to Supply Walsh with Ready-Made