Value Electronics uses a standard part in the manufacture of different types of radios.The total cost of producing 28,000 parts is $90,000,which includes fixed costs of $30,000 and variable costs of $60,000.The company can buy this part from an external supplier for $5 per unit and avoid 10% of the fixed costs.If Value Electronics decides to outsource the production of the part,how will it impact its operating income?

Question

Quizplus · Accepted Answer

If Value Electronics outsources, it will incur a cost of $140,000 (28,000 parts x $5) and save $3,000 in fixed costs (10% of $30,000). The total cost of outsourcing is $137,000, which is $47,000 more than the current cost of $90,000, leading to a decrease in operating income by $47,000.

Value Electronics Uses a Standard Part in the Manufacture of Different