A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month.
The controller says that they could outsource production of the circuit, if it reduces fixed cost greater than $200 per month. Is this statement true or false?

Question

Quizplus · Accepted Answer

Currently, the total cost of producing circuits in-house is:

Total Cost = (Variable Cost per unit * Number of units) + Fixed Cost 
Total Cost = ($26 * 100) + $5,000 
Total Cost = $7,600

If the company outsources the circuits at a contract price of $28 each, the total cost will be:

Total Cost = (Contract Price per unit * Number of units) 
Total Cost = ($28 * 100) 
Total Cost = $2,800

This means that the company can save:

Savings = Current cost - Outsourcing cost 
Savings = $7,600 - $2,800 
Savings = $4,800

Since the controller said that outsourcing production of the circuit is feasible if it reduces fixed cost greater than $200 per month, and the savings are $4,800 per month, it is true that outsourcing will reduce fixed cost by more than $200 per month. Therefore, the statement is true.

A Company Produces 100 Microwave Ovens Per Month, Each of Which