A company produces 100 microwave ovens per month,each of which includes one electrical circuit.The company currently manufactures the circuit 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.The controller says that they should outsource production of the circuit,if it reduces fixed cost more than $200 per month.Is this statement true or false?

Question

Quizplus · Accepted Answer

If the company outsources the circuit, it will save $2 per circuit ($26 variable cost - $28 contract cost). 
Therefore, the total savings in variable costs for 100 circuits will be $200 per month. 
If outsourcing also reduces fixed costs by more than $200 per month, it will be profitable for the company to outsource the circuits. 
Since the outsourcing cost of $28 is less than the current variable cost of $26, we can assume that the fixed cost reduction due to outsourcing will be more than $200 per month. 
Hence, the statement made by the controller is true.

A Company Produces 100 Microwave Ovens Per Month,each of Which