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 fixed costs are unavoidable, but that company could employ the vacated premises to earn rental income of $700 per month. How will it affect monthly operating income, if the company outsources?

Question

Quizplus · Accepted Answer

If the company outsources, it will save $26 per circuit in variable costs but will incur $28 per circuit in outsourcing costs, resulting in a net increase of $2 per circuit for 100 circuits, totaling $200. However, the company will also earn $700 in rental income, leading to a net increase in operating income of $500 ($700 - $200).

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