Fastec Automobile Company fabricates automobiles.Each vehicle includes one transfer case,which is currently made in-house.Details of the transfer case fabrication are as follows: $$\begin{array} { | l | r | l | }
\hline \text { Volume } & 800 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \
\hline \text { Fixed costs } & \$ 15,000 & \text { per month } \
\hline
\end{array}$$ A Korean factory has offered to supply Fastec with ready-made units for a price of $14 per transfer case.Assume that Fastec's fixed costs are unavoidable,but that Fastec could use the vacated production facilities to earn an additional $9500 of profit per month.If Fastec decides to outsource,monthly operating income will ________.

Question

Fastec Automobile Company fabricates automobiles.Each vehicle includes one transfer case,which is currently made in-house.Details of the transfer case fabrication are as follows: $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 800 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \
\hline \text { Fixed costs } & \$ 15,000 & \text { per month } \
\hline
\end{array}$$ A Korean factory has offered to supply Fastec with ready-made units for a price of $14 per transfer case.Assume that Fastec's fixed costs are unavoidable,but that Fastec could use the vacated production facilities to earn an additional $9500 of profit per month.If Fastec decides to outsource,monthly operating income will ________.

Quizplus · Accepted Answer

If Fastec outsources, it will save the variable cost of $8 per unit and the fixed cost of $15,000 per month. However, it will incur a cost of $14 per unit for the outsourced transfer cases. The net effect on monthly operating income will be:(800 units x $8 per unit) + $15,000 - (800 units x $14 per unit) + $9,500 = $4,700Therefore, monthly operating income will increase by $4,700.

Fastec Automobile Company Fabricates Automobiles A Korean Factory Has Offered to Supply Fastec with Ready-Made