Voyage Boat Company manufactures 100 luxury yachts per month.A compact media center is included in each yacht.Voyage Boat manufactures the media center in-house but is considering the possibility of outsourcing this function.At present,the variable cost per unit is $280,and the fixed costs are $38,000 per month.Aaron Dalton,the CEO,wishes to increase operating income by $2000.He has an offer from a foreign producer to provide the media centers at a contract cost of $350 per unit.The required savings in fixed costs in order to achieve his objective would be ________.

Question

Quizplus · Accepted Answer

To increase operating income by $2000, Voyage Boat Company must reduce its cost by $2000.
Let x be the required savings in fixed costs in order to achieve the objective.
If Voyage Boat continues to manufacture the media centers in-house, their total costs are:
Total Costs = (Variable Cost per Unit * Number of Units) + Fixed Costs
Total Costs = ($280 * 100) + $38,000
Total Costs = $66,000

If Voyage Boat outsources the media centers, their total costs would be:
Total Costs = (Contract Cost per Unit * Number of Units) + Fixed Costs - x
Total Costs = ($350 * 100) + $38,000 - x
Total Costs = $35,000 + $38,000 - x
Total Costs = $73,000 - x

Since the objective is to reduce costs by $2000, we can set the two equations equal to each other and solve for x:

$66,000 = $73,000 - x + $2,000
$x = $9,000

Therefore, Voyage Boat Company would need to save $9,000 in fixed costs to achieve their objective of increasing operating income by $2,000. The answer is C.

Voyage Boat Company Manufactures 100 Luxury Yachts Per Month