Tosh Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:

A factory in Indonesia has offered to supply Tosh with ready-made units for a cost of $8 each.Assume that Tosh'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,Tosh should outsource.

Question

Tosh Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
  
A factory in Indonesia has offered to supply Tosh with ready-made units for a cost of $8 each.Assume that Tosh'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,Tosh should outsource.

Quizplus · Accepted Answer

Tosh should consider the opportunity cost of using its production facilities to earn an additional profit of $5,000 per month instead of making wiring harnesses in-house. Since the cost of outsourcing is lower than the cost of making in-house, Tosh can reduce its costs and increase its operating income by outsourcing the wiring harnesses. Therefore, the company should outsource to the factory in Indonesia to maximize its operating income.

Tosh Company Fabricates Automobiles