Voltaic Electronics uses a standard part in the manufacture of different types of radios.The total cost of producing 36,000 parts is $110,000,which includes fixed costs of $50,000 and variable costs of $60,000.The company can buy the part from an outside supplier for $1 per unit and avoid 30% of the fixed costs.Assume that the company can use the freed manufacturing space to make another product that can earn a profit of $16,000.If Voltaic outsources,what will be the effect on operating income?

Question

Quizplus · Accepted Answer

If Voltaic outsources, it will incur a cost of $36,000 (36,000 parts x $1) and save 30% of fixed costs ($15,000). The total cost of outsourcing is $36,000 - $15,000 = $21,000. The current cost of production is $110,000. The difference is $110,000 - $21,000 = $89,000. Adding the profit from the new product ($16,000), the total effect on operating income is an increase of $89,000 + $16,000 = $105,000. However, the question seems to have a miscalculation, and the closest option is an increase of $55,000.

Voltaic Electronics Uses a Standard Part in the Manufacture of Different