Voyage Boat Company manufactures 100 luxury yachts per month.A compact media center is included in each yacht.Voyage Boat manufactures the media center in-house but is considering the possibility of outsourcing this function.At present,the variable cost per unit is $280,and the fixed costs are $42,000 per month.Aaron Dalton,the CEO,wishes to increase operating income by $3000.He has an offer from a foreign producer to provide the media centers at a contract cost of $350 per unit.The required savings in fixed costs in order to achieve his objective would be ________.

Question

Quizplus · Accepted Answer

The current cost of manufacturing in-house is $280 per unit, and Voyage Boat manufactures 100 yachts per month. Therefore, the current monthly cost of manufacturing (including both fixed and variable costs) is:

$280 * 100 + $42,000 = $70,000

If Voyage Boat outsources the media center production to the foreign producer, the cost per unit would be $350. Therefore, the monthly cost of outsourcing would be:

$350 * 100 = $35,000

This is a cost savings of $35,000 - $70,000 = -$35,000 per month, which does not align with the CEO's objective of increasing operating income by $3,000.

To achieve the $3,000 increase in operating income, Voyage Boat needs to save $3,000 / 100 = $30 per unit. This means that the total monthly cost needs to be reduced by:

$30 * 100 = $3,000

Since the variable cost per unit is already lower than the proposed contract cost, the only way to achieve these savings is by reducing fixed costs. The required savings in fixed costs can be found by solving the following equation for X:

$280 * 100 + X = $70,000 - $3,000
X = $10,000

Therefore, the required savings in fixed costs to achieve the CEO's objective is $10,000. Answer Choice C is correct.

Voyage Boat Company Manufactures 100 Luxury Yachts Per Month