Mulcahey Automobiles Company fabricates automobiles.Each vehicle includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows: $$\begin{array} { | l | r | l | }
\hline \text { Volume } & 800 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 7 & \text { per unit } \
\hline \text { Fixed costs } & \$ 12,000 & \text { per month } \
\hline
\end{array}$$ An Indonesian factory has offered to supply Mulcahey with ready-made units for a cost of $15 per wiring harness.Assume that Mulcahey's fixed costs could be reduced by $4,000 if it outsources and that Mulcahey will not be able to use the excess capacity in any profitable manner.If Mulcahey decides to outsource,monthly operating income will ________.

Question

Mulcahey Automobiles Company fabricates automobiles.Each vehicle includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows: $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 800 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 7 & \text { per unit } \
\hline \text { Fixed costs } & \$ 12,000 & \text { per month } \
\hline
\end{array}$$ An Indonesian factory has offered to supply Mulcahey with ready-made units for a cost of $15 per wiring harness.Assume that Mulcahey's fixed costs could be reduced by $4,000 if it outsources and that Mulcahey will not be able to use the excess capacity in any profitable manner.If Mulcahey decides to outsource,monthly operating income will ________.

Quizplus · Accepted Answer

The cost of making in-house is $17,600 ($7*800 + $12,000). Outsourcing costs $12,000 ($15*800) with reduced fixed costs of $8,000 ($12,000 - $4,000). The total cost when outsourcing is $20,000, leading to a decrease in operating income by $2,400 ($20,000 - $17,600).

Mulcahey Automobiles Company Fabricates Automobiles An Indonesian Factory Has Offered to Supply Mulcahey with Ready-Made