Ultimate Travel Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
$$\begin{array} { | l | r | l | }
\hline \text { Volume } & 900 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 10 & \text { per unit } \
\hline \text { Fixed costs } & \$ 15,000 & \text { per month } \
\hline
\end{array}$$ A factory in India has offered to supply Ultimate Travel with ready-made units for a cost of $7 each.Assume that Ultimate Travel'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,Ultimate Travel should outsource.

Question

Ultimate Travel Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
 $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 900 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 10 & \text { per unit } \
\hline \text { Fixed costs } & \$ 15,000 & \text { per month } \
\hline
\end{array}$$ A factory in India has offered to supply Ultimate Travel with ready-made units for a cost of $7 each.Assume that Ultimate Travel'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,Ultimate Travel should outsource.

Quizplus · Accepted Answer

Outsourcing would reduce the variable cost per unit from $10 to $7, saving $2,700 per month (900 units x $3 savings). The additional profit from using the vacated facilities is $5,000, totaling $7,700 in savings, which exceeds the fixed costs of $15,000.

Ultimate Travel Company Fabricates Automobiles A Factory in India Has Offered to Supply Ultimate Travel