Dong Fang Company fabricates inexpensive automobiles for sale to 3 rd world countries. Each auto includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows:
$$\begin{array} { | l | r | r | }
\hline \text { Volune } & 900 & \text { Units per month } \
\hline \text { Varigble cost per unit } & \$ 8.00 & \text { Per unit } \
\hline \text { Fixed costs } & \$ 14,000 & \text { Per month } \
\hline
\end{array}$$
A factory in Indonesia has offered to supply Dong Fang with ready-made units for a price of $14.00 each.
-
Assume that Dong Fang's fixed costs are unavoidable, and that Dong Fang will not be able to use the excess capacity in any profitable manner. In order to maximize operational income, Dong Fang should not outsource.

Question

Dong Fang Company fabricates inexpensive automobiles for sale to 3 rd world countries. Each auto includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows:
 $$\begin{array} { | l | r | r | } 
\hline \text { Volune } & 900 & \text { Units per month } \
\hline \text { Varigble cost per unit } & \$ 8.00 & \text { Per unit } \
\hline \text { Fixed costs } & \$ 14,000 & \text { Per month } \
\hline
\end{array}$$ 
A factory in Indonesia has offered to supply Dong Fang with ready-made units for a price of $14.00 each.
-
Assume that Dong Fang's fixed costs are unavoidable, and that Dong Fang will not be able to use the excess capacity in any profitable manner. In order to maximize operational income, Dong Fang should not outsource.

Quizplus · Accepted Answer

The total cost of making the harness in-house is $21,200 ($8.00 * 900 + $14,000), while outsourcing would cost $12,600 ($14.00 * 900). However, since fixed costs are unavoidable and the excess capacity cannot be used profitably, the decision should be based on variable costs alone. The variable cost of $8.00 per unit is less than the outsourcing cost of $14.00 per unit, so Dong Fang should not outsource to maximize operational income.

Dong Fang Company Fabricates Inexpensive Automobiles for Sale to 3rd

Dong Fang Company Fabricates Inexpensive Automobiles for Sale to 3^rd