Cheong Automobiles Company fabricates automobiles.Each vehicle includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows: $$\begin{array} { | l | r | l | }
\hline \text { Volume } & 1,300 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 12,50 & \text { per unit } \
\hline \text { Fixed costs } & \$ 15,000 & \text { per month } \
\hline
\end{array}$$ An Indonesian factory has offered to supply Cheong Company with ready-made units for a cost of $17 for each harness.Assume that Cheong's fixed costs are unavoidable and that Cheong will not be able to use the excess capacity in any profitable manner.If Cheong decides to outsource,monthly operating income will ________.

Question

Cheong Automobiles Company fabricates automobiles.Each vehicle includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows: $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 1,300 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 12,50 & \text { per unit } \
\hline \text { Fixed costs } & \$ 15,000 & \text { per month } \
\hline
\end{array}$$ An Indonesian factory has offered to supply Cheong Company with ready-made units for a cost of $17 for each harness.Assume that Cheong's fixed costs are unavoidable and that Cheong will not be able to use the excess capacity in any profitable manner.If Cheong decides to outsource,monthly operating income will ________.

Quizplus · Accepted Answer

If Cheong outsources, the cost per unit will increase from $12.50 to $17, leading to an additional cost of $4.50 per unit. For 1,300 units, this results in an increased cost of $5,850 per month, decreasing operating income by that amount.

Cheong Automobiles Company Fabricates Automobiles An Indonesian Factory Has Offered to Supply Cheong Company with Is