A company produces 500 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 $28 each.Currently,the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5,000 per month.Assume the fixed costs are unavoidable but that company could employ the vacated premises to earn rental income of $2,200 per month.If the company outsources,monthly operating income will ________.

Question

Quizplus · Accepted Answer

The cost of producing circuits in-house is $26 per circuit plus $5,000 fixed costs. Outsourcing costs $28 per circuit. The difference in variable costs is $2 per circuit ($28 - $26), which for 500 units is $1,000. The rental income from vacated premises is $2,200. Therefore, the net effect on operating income is an increase of $1,200 ($2,200 - $1,000).

A Company Produces 500 Microwave Ovens Per Month,each of Which