Ultimate Travel Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
$$\begin{array} { | l | l | l | }
\hline \text { Volume } & 1,000 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 7 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000 & \text { per month } \
\hline
\end{array}$$ A factory in India has offered to supply Ultimate Travel with ready-made units for a cost of $8 each.Assume that Ultimate Travel's fixed costs are unavoidable,but the company could use the vacated production facilities to earn an additional $5,000 of profit per month.In order to maximize operating income,Ultimate Travel should outsource.

Question

Ultimate Travel Company fabricates automobiles.Each auto includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
 $$\begin{array} { | l | l | l | } 
\hline \text { Volume } & 1,000 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 7 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000 & \text { per month } \
\hline
\end{array}$$ A factory in India has offered to supply Ultimate Travel with ready-made units for a cost of $8 each.Assume that Ultimate Travel's fixed costs are unavoidable,but the company could use the vacated production facilities to earn an additional $5,000 of profit per month.In order to maximize operating income,Ultimate Travel should outsource.

Quizplus · Accepted Answer

Outsourcing the wiring harness will result in a cost savings of $8 per unit, which will increase the operating income of Ultimate Travel. Additionally, the vacated production facilities can be used to generate additional profit, further increasing the company's operating income. Therefore, outsourcing is the best choice to maximize operating income.

Ultimate Travel Company Fabricates Automobiles A Factory in India Has Offered to Supply Ultimate Travel