Doro Fill 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:
$\begin{array} { | l | c | r|} \hline \text { Volume } & 800 &\text { units per month } \\\hline \text { Variable cost per unit } & \$ 7& \text { per unit } \\\hline \text { Fixed costs } & \$ 15,000 &\text { per month } \\\hline\end{array}$ A factory in Indonesia has offered to supply Dora Fill with ready-made units for a price of $10 each. Assume that Doro Fill's fixed costs are unavoidable, and that the company will not be able to use the excess capacity in any profitable manner. In order to maximize operating income, Doro Fill should not outsource.

Question

Doro Fill 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:

\begin{array} { | l | c | r|} \hline \text { Volume } & 800 &\text { units per month } \\\hline \text { Variable cost per unit } & \$ 7& \text { per unit } \\\hline \text { Fixed costs } & \$ 15,000 &\text { per month } \\\hline\end{array}

A factory in Indonesia has offered to supply Dora Fill with ready-made units for a price of $10 each. Assume that Doro Fill's fixed costs are unavoidable, and that the company will not be able to use the excess capacity in any profitable manner. In order to maximize operating income, Doro Fill should not outsource.

Quizplus · Accepted Answer

Since the fixed costs are unavoidable and the variable cost per unit ($7) is less than the outsourcing cost ($10), Doro Fill should continue making the harnesses in-house to minimize costs and maximize operating income.

Doro Fill Company Fabricates Inexpensive Automobiles for Sale to 3rd

Doro Fill Company Fabricates Inexpensive Automobiles for Sale to 3^rd