Fin 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: A factory in Indonesia has offered to supply Fin Company with ready-made units for a price of $15 each. Assume that Fin's fixed costs are unavoidable, and that Fin will not be able to use the excess capacity in any profitable manner. What will be the impact on Fin's monthly operating income, if Fin decides to outsource?

Question

Quizplus · Accepted Answer

The cost of making one wiring harness in-house is not given, so we cannot calculate the savings per unit by outsourcing. However, we are told that the supplier is offering to sell the harnesses for $15 each. Therefore, if Fin Company decides to outsource, variable costs will increase by $15 per unit. This means that the contribution margin per unit will decrease by $15.

Assuming that the fixed costs remain constant, this decrease in contribution margin per unit will lead to a decrease in operating income. The amount of the decrease will depend on the number of units produced and sold.

Therefore, the correct answer is D) It will go down by $3,000.

Fin Company Fabricates Inexpensive Automobiles for Sale to 3rd World

Fin Company Fabricates Inexpensive Automobiles for Sale to 3^rd World