Voltaic Electronics uses a standard part in the manufacture of different types of radios.The total cost of producing 35,000 parts is $105,000,which includes fixed costs of $50,000 and variable costs of $55,000.The company can buy the part from an outside supplier for $2 per unit and avoid 20% of the fixed costs.Assume that the company can use the freed manufacturing space to make another product that can earn a profit of $16,000.If Voltaic outsources,what will be the effect on operating income?

Question

Quizplus · Accepted Answer

If Voltaic outsources, they will avoid the variable costs of $55,000 and 20% of the fixed cost, which is $10,000 ($50,000 x 20%). Therefore, the total cost of purchasing the parts from an outside supplier is:
$2 x 35,000 + $40,000 = $110,000

If Voltaic manufactures the parts in-house, the total cost is $105,000.

Therefore, the net effect on operating income is:
$16,000 - ($110,000 - $105,000) = $11,000 decrease

Thus, the correct answer is A, decrease of $11,000.

Voltaic Electronics Uses a Standard Part in the Manufacture of Different