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 eliminate all 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

Currently, the company is spending a total of ($26 variable cost per circuit x 100 circuits per month) + $5,000 fixed cost per month = $7,600 per month to produce circuits in-house.

If the company outsources, they will pay $28 per circuit for 100 circuits per month = $2,800 per month.

Therefore, the company's monthly operating income will increase by ($7,600 - $2,800) = $4,800 if they outsource.

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