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, but that Dong could use the vacated production facilities to earn an additional $7,500 of profit per month. In order to maximize operational income, Dong Fang should 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, but that Dong could use the vacated production facilities to earn an additional $7,500 of profit per month. In order to maximize operational income, Dong Fang should outsource.

Quizplus · Accepted Answer

The total cost of making the harness in-house is $21,200 ($8 * 900 + $14,000). Outsourcing would cost $12,600 ($14 * 900). Even after considering the additional $7,500 profit from using the facilities differently, outsourcing is cheaper by $1,100 ($21,200 - $12,600 - $7,500).

Dong Fang Company Fabricates Inexpensive Automobiles for Sale to 3rd

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