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: $$\begin{array} { | l | r | l | }
\hline \text { Volume } & 800 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000 & \text { per month } \
\hline
\end{array}$$ An Indonesian factory has offered to supply Priestly with ready-made units for a price of $13 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: $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 800 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000 & \text { per month } \
\hline
\end{array}$$ An Indonesian factory has offered to supply Priestly with ready-made units for a price of $13 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

The current cost of producing 800 units in-house is the sum of variable costs ($8 per unit * 800 units = $6,400) and fixed costs ($14,000), totaling $20,400. If Priestly outsources, they would pay $13 per unit for 800 units, totaling $10,400, and could earn an additional $9,500 from using the vacated facilities, effectively reducing the outsourcing cost to $900 ($10,400 - $9,500). The difference in costs between in-house production ($20,400) and effective outsourcing cost ($900) is $19,500. However, since the question asks for the change in monthly operating income, not the difference in costs, we consider the savings from outsourcing ($10,400 instead of $20,400) plus the additional profit ($9,500), which results in a net increase in operating income of $5,500 ($19,500 - $14,000 fixed costs that are unavoidable).

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