Xon Company needs 1,000 components for one of its products. It can subcontract production of the components to the Eon Company for $40 each. Xon Company can produce the components internally for a total variable cost of $30 per component and has spare capacity. What will be the impact on Xon's profit if Eon's offer is accepted?

Question

Quizplus · Accepted Answer

If Xon Company decides to produce the components internally, the total variable cost will be $30,000 (1,000 components x $30 each). If they subcontract production to Eon Company, the cost will be $40,000 (1,000 components x $40 each). Therefore, if Xon accepts Eon's offer, their profit will decrease by $10,000 ($40,000 - $30,000).

Xon Company Needs 1,000 Components for One of Its Products