Seven Seas Company Manufactures 100 Luxury Yachts Per Month

Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media center. Seven Seas manufactures the media center in-house, but is considering the possibility of outsourcing that function, in order to close down some of their facilities and reduce the administrative costs. At present, the variable cost per unit is $275 and the fixed costs are $39,000 per month. Assume that if they outsource, fixed costs could be reduced by 40%. The production manager advised the company to contract with a foreign supplier which offered a contract rate of $420 per unit. If they outsource, how would that affect operational income?

A) Operational income would improve by $1,100.
B) Operational income would improve by $4,000.
C) Operational income would decline by $14,500.
D) Operational income would remain the same.