Dong Fang 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: $\begin{array} { | l | r | l | } \hline \text { Volume } & 900 & \text { units per month } \\\hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \\\hline \text { Fixed costs } & \$ 14,000 & \text { per month } \\\hline\end{array}$ A factory in Indonesia has offered to supply Dong Fang with ready-made units for a price of $14 each.
Assume that Dong Fang's fixed costs could be reduced by $5,000 if they outsource, and that Dong Fang will not be able to use the excess capacity in any profitable manner. What will be the impact on Dong Fang's monthly operating income, if Dong Fang decides to outsource?

Question

Dong Fang 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 | r | l | } \hline \text { Volume } & 900 & \text { units per month } \\\hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \\\hline \text { Fixed costs } & \$ 14,000 & \text { per month } \\\hline\end{array}

A factory in Indonesia has offered to supply Dong Fang with ready-made units for a price of $14 each.
Assume that Dong Fang's fixed costs could be reduced by $5,000 if they outsource, and that Dong Fang will not be able to use the excess capacity in any profitable manner. What will be the impact on Dong Fang's monthly operating income, if Dong Fang decides to outsource?

Quizplus · Accepted Answer

The cost of making in-house is $21,200 ($8*900 + $14,000). Outsourcing costs $12,600 ($14*900) with reduced fixed costs of $9,000 ($14,000 - $5,000). The total cost when outsourcing is $21,600, so the operating income decreases by $400 ($21,600 - $21,200).

Dong Fang Company Fabricates Inexpensive Automobiles for Sale to 3rd

Dong Fang Company Fabricates Inexpensive Automobiles for Sale to 3^rd