A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures 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. Assume the company could not reduce any fixed costs by outsourcing, and that there is no alternative use for the facilities presently being used to make circuits. How will it affect monthly operating income, if the company outsources?

Question

Quizplus · Accepted Answer

The cost of producing circuits in-house is $26 per circuit plus $5,000 fixed costs. Outsourcing costs $28 per circuit. Producing in-house costs $2,600 (variable) + $5,000 (fixed) = $7,600. Outsourcing costs $2,800. The difference is $200, so operating income will decrease by $200.

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