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: $$\begin{array} { | l | r | l | }
\hline \text { Volume } & 900 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 6 & \text { per unit } \
\hline \text { Fixed costs } & \$ 12,000 & \text { per month } \
\hline
\end{array}$$ An Indonesian factory has offered to supply Mulcahey with ready-made units for a cost of $16 per wiring harness.Assume that Mulcahey's fixed costs could be reduced by $5,000 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: $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 900 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 6 & \text { per unit } \
\hline \text { Fixed costs } & \$ 12,000 & \text { per month } \
\hline
\end{array}$$ An Indonesian factory has offered to supply Mulcahey with ready-made units for a cost of $16 per wiring harness.Assume that Mulcahey's fixed costs could be reduced by $5,000 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 current in-house production cost is calculated as the sum of variable costs and fixed costs. Variable costs are $6 per unit for 900 units, which equals $5,400. Fixed costs are $12,000. So, the total current cost is $5,400 + $12,000 = $17,400. If Mulcahey outsources, the cost will be $16 per unit for 900 units, which equals $14,400, and the fixed costs would reduce by $5,000, making them $7,000. So, the total cost after outsourcing would be $14,400 + $7,000 = $21,400. The difference in costs before and after outsourcing is $21,400 - $17,400 = $4,000, indicating that monthly operating income will decrease by $4,000 if Mulcahey decides to outsource.

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