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 are unavoidable, but that Dong could use the vacated production facilities to earn an additional $7,500 of profit per month. 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 are unavoidable, but that Dong could use the vacated production facilities to earn an additional $7,500 of profit per month. What will be the impact on Dong Fang's monthly operating income, if Dong Fang decides to outsource?

Quizplus · Accepted Answer

The variable cost of making the harnesses in-house is $8 per unit, and the fixed cost is $14,000 per month. The total cost of making the harnesses in-house is therefore $8 * 900 + $14,000 = $22,600 per month. The cost of buying the harnesses from the Indonesian factory would be $14 * 900 = $12,600 per month. The difference between these two costs is $22,600 - $12,600 = $10,000 per month. However, Dong Fang could also earn an additional $7,500 of profit per month by using the vacated production facilities. Therefore, the total impact on Dong Fang's monthly operating income would be $10,000 + $7,500 = $17,500.

Dong Fang Company Fabricates Inexpensive Automobiles for Sale to 3rd

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