A company produces 200 microwave ovens per month,each of which includes one electrical circuit.The company currently manufactures the circuits in-house but is considering outsourcing the circuits at a contract cost of $30 each.Currently,the cost of producing circuits in-house includes variable costs of $24 per circuit and fixed costs of $15,000 per month.Assume the company could cut fixed costs in half by outsourcing and that there is no alternative use for the facilities presently being used to make circuits.If the company outsources,operating income will ________.

Question

Quizplus · Accepted Answer

Currently, the cost per circuit produced in-house can be calculated as:

Cost per circuit = (Variable cost per circuit) + (Fixed cost per month / Number of circuits produced per month)
Cost per circuit = ($24) + ($15,000 / 200)
Cost per circuit = $96

If the company outsources, the cost per circuit will be $30, and the fixed costs will be reduced to $7,500 per month. The company will need to purchase 200 circuits per month from the outsourcer, so the total cost of circuits will be:

Total cost of circuits = (Number of circuits purchased per month) x (Cost per circuit)
Total cost of circuits = (200) x ($30)
Total cost of circuits = $6,000

The total cost of producing microwave ovens can be calculated as:

Total cost = (Number of microwave ovens produced per month) x (Cost per oven)
Total cost = (200) x ($96)
Total cost = $19,200

If the company outsources, the total cost will be:

Total cost = (Number of microwave ovens produced per month) x (Cost per oven) + (Total cost of circuits)
Total cost = (200) x ($30 + $24) + ($6,000)
Total cost = $12,600

Therefore, the operating income if the company outsources will be:

Operating income = (Revenue) - (Total cost)
Operating income = (200 x Price per oven) - ($12,600)

We do not have information about the revenue or price per oven, so we cannot calculate the exact change in operating income. However, we can compare the total costs and see that outsourcing will result in lower total costs ($12,600 < $19,200). Therefore, the operating income will increase. The increase in operating income can be calculated as:

Increase in operating income = ($19,200) - ($12,600)
Increase in operating income = $6,600

Therefore, the answer is A) increase by $6,300.

A Company Produces 200 Microwave Ovens Per Month,each of Which