Walsh Automobile Company fabricates automobiles. Each vehicle includes one airflow sensor, which is currently made in-house. Details of the airflow sensor fabrication are as follows: $$\begin{array} { | l | r | l | }
\hline \text { Volume } & 900 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000 & \text { per month } \
\hline
\end{array}$$ A Japanese factory has offered to supply Walsh with ready-made units for a cost of $15 per sensor. Assume that Walsh's fixed costs could be reduced by $4000 if it outsources and that Walsh will not be able to use the excess capacity in any profitable manner. If Walsh decides to outsource, monthly operating income will ________.

Question

Walsh Automobile Company fabricates automobiles. Each vehicle includes one airflow sensor, which is currently made in-house. Details of the airflow sensor fabrication are as follows: $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 900 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000 & \text { per month } \
\hline
\end{array}$$ A Japanese factory has offered to supply Walsh with ready-made units for a cost of $15 per sensor. Assume that Walsh's fixed costs could be reduced by $4000 if it outsources and that Walsh will not be able to use the excess capacity in any profitable manner. If Walsh decides to outsource, monthly operating income will ________.

Quizplus · Accepted Answer

If Walsh outsources, the cost per month for 900 units at $15 each is $13,500. Currently, the total cost of making these in-house is $14,000 (fixed) + ($8 * 900) = $21,200. The reduction in fixed costs by outsourcing would be $14,000 - $4,000 = $10,000. So, the new total cost with outsourcing would be $13,500 + $10,000 = $23,500. This is an increase in costs by $23,500 - $21,200 = $2,300, meaning the monthly operating income will decrease by $2,300.

Walsh Automobile Company Fabricates Automobiles A Japanese Factory Has Offered to Supply Walsh with Ready-Made