Sanchez Semiconductors produces 200,000 high-tech computer chips per month.Each chip uses a component that Sanchez makes in-house.The variable costs to make the component are $1.20 per unit,and the fixed costs are $1,200,000 per month.The company has been approached by a foreign producer who can supply the component,within acceptable quality standards,for $1.00 each.If the company chooses to outsource,fixed costs can be reduced by 30%.There are no other uses for the facilities currently employed in making the component.What would be the effect on operating income,if the company decides to outsource?

Question

Quizplus · Accepted Answer

The variable cost of making the component in-house is $1.20 per unit, and the company produces 200,000 units per month. So, the total variable cost of making the component in-house is $240,000 per month. The fixed cost of making the component in-house is $1,200,000 per month. So, the total cost of making the component in-house is $1,440,000 per month.If the company outsources the component, the variable cost will be $1.00 per unit, and the fixed cost will be reduced by 30%, to $840,000 per month. So, the total cost of outsourcing the component will be $1,040,000 per month.Therefore, the company would save $400,000 per month by outsourcing the component.

Sanchez Semiconductors Produces 200,000 High-Tech Computer Chips Per Month