Alexandria Semiconductors produces 300,000 hi-tech computer chips per month. Each chip uses a component which Alexandria makes in-house. The variable costs to make the component are $0.80 per unit, and the fixed costs run $956,000 per month. Alexandria has been approached by a foreign producer who can supply the component, ready-made and with acceptable quality standards for $0.60 each. If Alexandria chooses to outsource, it could reduce the fixed costs by 50%. Alexandria would have no other use for the facilities currently employed in making the component. If Alexandria decides to outsource, how would that affect the operating income?

Question

Quizplus · Accepted Answer

C) Calculations:
(300,000 × $0.80) + $956,000 = $1,196,000
(300,000 × $0.60) + ($956,000 × 50%) = $658,000
$1,196,000 - $658,000 = $538,000

Alexandria Semiconductors Produces 300,000 Hi-Tech Computer Chips Per Month