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 reduces the variable cost per unit from $10 to $7, and although the fixed costs of $15,000 are unavoidable, the ability to earn an additional $5,000 of profit by using the vacated facilities offsets part of these fixed costs, making outsourcing financially beneficial for maximizing operating income.

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