Fastec Automobile Company fabricates automobiles. Each vehicle includes one transfer case, which is currently made in-house. Details of the transfer case fabrication are as follows: $$\begin{array} { | l | r | l | }
\hline \text { Volume } & 900 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 6 & \text { per unit } \
\hline \text { Fixed costs } & \$ 16,000& \text { per month } \
\hline
\end{array}$$ A Korean factory has offered to supply Fastec with ready-made units for a price of $13 per transfer case. Assume that Fastec's fixed costs are unavoidable, but that Fastec could use the vacated production facilities to earn an additional $9500 of profit per month. If Fastec decides to outsource, monthly operating income will ________.

Question

Fastec Automobile Company fabricates automobiles. Each vehicle includes one transfer case, which is currently made in-house. Details of the transfer case fabrication are as follows: $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 900 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 6 & \text { per unit } \
\hline \text { Fixed costs } & \$ 16,000& \text { per month } \
\hline
\end{array}$$ A Korean factory has offered to supply Fastec with ready-made units for a price of $13 per transfer case. Assume that Fastec's fixed costs are unavoidable, but that Fastec could use the vacated production facilities to earn an additional $9500 of profit per month. If Fastec decides to outsource, monthly operating income will ________.

Quizplus · Accepted Answer

If Fastec outsources, the cost of purchasing the transfer cases would be $13 * 900 = $11,700 per month. Currently, the cost to produce them in-house is $6 * 900 + $16,000 = $21,400 per month. By outsourcing, Fastec saves $21,400 - $11,700 = $9,700 per month. Additionally, Fastec can earn $9,500 by using the vacated facilities for another purpose. The total increase in monthly operating income would be $9,700 (savings) + $9,500 (additional profit) = $19,200. However, since the fixed costs of $16,000 are unavoidable, they remain as an expense. Therefore, the net increase in operating income is $19,200 - $16,000 = $3,200.

Fastec Automobile Company Fabricates Automobiles A Korean Factory Has Offered to Supply Fastec with Ready-Made