Tosh Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
$$\begin{array} { | l | r | l | }
\hline \text { Volume } & 900 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 10 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000 & \text { per month } \
\hline
\end{array}$$ A factory in Indonesia has offered to supply Tosh with ready-made units for a cost of $8 each.Assume that Tosh's fixed costs are unavoidable,but the company could use the vacated production facilities to earn an additional $5,000 of profit per month.In order to maximize operating income,Tosh should outsource.

Question

Tosh Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
 $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 900 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 10 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000 & \text { per month } \
\hline
\end{array}$$ A factory in Indonesia has offered to supply Tosh with ready-made units for a cost of $8 each.Assume that Tosh's fixed costs are unavoidable,but the company could use the vacated production facilities to earn an additional $5,000 of profit per month.In order to maximize operating income,Tosh should outsource.

Quizplus · Accepted Answer

It would be more profitable for Tosh to outsource the wiring harnesses as the cost of purchasing them from the factory in Indonesia is lower than the cost of producing them in-house. By outsourcing, Tosh can save on variable costs associated with in-house production and generate additional profit by using the vacated facilities for other production or revenue-generating activities. Therefore, outsourcing would maximize Tosh's operating income.

Tosh Company Fabricates Automobiles A Factory in Indonesia Has Offered to Supply Tosh with Currently