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, but the company could use the vacated production facilities to earn an additional $5,000 of profit per month. In order to maximize operating income, Doro Fill should 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, but the company could use the vacated production facilities to earn an additional $5,000 of profit per month. In order to maximize operating income, Doro Fill should outsource.

Quizplus · Accepted Answer

The variable cost of making the wiring harness in-house is $7 per unit, while it is only $10 per unit if they outsource it to the factory in Indonesia. Therefore, outsourcing will result in cost savings for Doro Fill. Even if they have unavoidable fixed costs of $15,000 per month, they can still make a profit by outsourcing and using the vacated production facilities to earn an additional $5,000 of profit per month. Therefore, outsourcing will maximize Doro Fill's operating income.

Doro Fill Company Fabricates Inexpensive Automobiles for Sale to 3rd

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