Lightning Semiconductors produces 200,000 hi-tech computer chips per month.Each chip uses a component that Lightning makes in-house.The variable costs to make the component are $1.20 per unit,and the fixed costs are $1,300,000 per month.The company has been approached by a foreign producer who can supply the component,within acceptable quality standards,for $1.10 each.The fixed costs are unavoidable,and Lightning would have no other use for the facilities currently employed in making the component.What would be the effect on operating income if the company decides to outsource?

Question

Quizplus · Accepted Answer

If Lightning Semiconductors decides to outsource the component, the variable cost would decrease from $1.20 to $1.10 per unit, resulting in a savings of $0.10 per unit. Since the company produces 200,000 chips per month, the monthly savings would be $20,000 ($0.10 x 200,000). Therefore, the company could save $20,000 per month in costs by outsourcing the component. However, the fixed costs of $1,300,000 per month are unavoidable, regardless of whether the company makes the component in-house or outsources it. Therefore, the correct answer is C.

Lightning Semiconductors Produces 200,000 Hi-Tech Computer Chips Per Month