Priestly Automobiles Company fabricates automobiles.Each vehicle includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows: $$\begin{array} { | l | r | l | }
\hline \text { Volume } & 700 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 7 & \text { per unit } \
\hline \text { Fixed costs } & \$ 16,000 & \text { per month } \
\hline
\end{array}$$ An Indonesian factory has offered to supply Priestly with ready-made units for a price of $14 per wiring harness.Assume that Priestly's fixed costs are unavoidable,but that Priestly could use the vacated production facilities to earn an additional $9,500 of profit per month.If Priestly decides to outsource,monthly operating income will ________.

Question

Priestly Automobiles Company fabricates automobiles.Each vehicle includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows: $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 700 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 7 & \text { per unit } \
\hline \text { Fixed costs } & \$ 16,000 & \text { per month } \
\hline
\end{array}$$ An Indonesian factory has offered to supply Priestly with ready-made units for a price of $14 per wiring harness.Assume that Priestly's fixed costs are unavoidable,but that Priestly could use the vacated production facilities to earn an additional $9,500 of profit per month.If Priestly decides to outsource,monthly operating income will ________.

Quizplus · Accepted Answer

If Priestly decides to outsource, the variable cost of wiring harnesses will be reduced by $7 per unit, and the fixed costs of $16,000 per month will be eliminated. However, Priestly will also lose the $9,500 of profit per month that it could earn by using the vacated production facilities. Therefore, the monthly operating income will increase by $4,600 ($7 per unit x 700 units per month - $16,000 per month + $9,500 per month).

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