Valuable Electronics uses a standard part in the manufacture of different types of radios.The total cost of producing 29,000 parts is $105,000,which includes fixed costs of $50,000 and variable costs of $55,000.The company can buy the part from an outside supplier for $2 per unit and avoid 30% of the fixed costs.Assume that the company can use the freed manufacturing space to make another product that can earn a profit of $16,000.If Valuable outsources,what will be the effect on operating income?

Question

Quizplus · Accepted Answer

If Valuable Electronics outsources, the total cost of buying the parts is $2 per unit for 29,000 units, which equals $58,000. They can avoid 30% of the fixed costs, which is $15,000 ($50,000 * 30%). So, the total savings from fixed costs and variable costs is $70,000 ($55,000 variable costs + $15,000 fixed costs savings). However, they have to spend $58,000 to buy the parts, resulting in a net savings of $12,000 ($70,000 - $58,000). Adding the profit of $16,000 from using the manufacturing space for another product, the total increase in operating income is $28,000 ($12,000 + $16,000).

Valuable Electronics Uses a Standard Part in the Manufacture of Different