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, and then as long as they could get fixed cost reductions greater than $200 per month, it would improve earnings. Is his statement true or false?

Question

Quizplus · Accepted Answer

Calculations:
(100 × $26) + $5,000 = $7,600
(100 × $28) + $5,000 - $200 = $7,600

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