A company produces 300 microwave ovens per month,each of which includes one electrical circuit.The company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract cost of $34 each.Currently,the cost of producing circuits in-house includes variable costs of $28 per circuit and fixed costs of $6,000 per month.The controller says that they could outsource production of the circuit,if it reduces fixed cost more than $1,800 per month.Is this statement true or false?

Question

Quizplus · Accepted Answer

The total cost of producing the circuits in-house is:
Total cost = (Variable cost per unit * Quantity) + Fixed cost
Total cost = ($28 * 300) + $6,000
Total cost = $8,400 per month

If the company outsources the circuit production, the cost would be:
Total cost = Contract cost per unit * Quantity
Total cost = $34 * 300
Total cost = $10,200 per month

The difference in cost between in-house production and outsourcing is:
$10,200 - $8,400 = $1,800

Since the fixed cost reduction from outsourcing is exactly $1,800, it meets the controller's condition of reducing fixed costs by more than $1,800 per month. Therefore, the statement is true.

A Company Produces 300 Microwave Ovens Per Month,each of Which