Cheong Automobile Company fabricates automobiles.Each vehicle includes one water pump,which is currently made in-house.Details of the water pump assembly are as follows: $$\begin{array} { | l | r | l | }
\hline \text { Volume } & 1300 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 10.50 & \text { per unit } \
\hline \text { Fixed costs } & \$ 10,000 & \text { per month } \
\hline
\end{array}$$ An Indonesian factory has offered to supply Cheong Automobile Company with ready-made units for a cost of $15 for each water pump.Assume that Cheong's fixed costs are unavoidable and that Cheong will not be able to use the excess capacity in any profitable manner.If Cheong decides to outsource,monthly operating income will ________.

Question

Cheong Automobile Company fabricates automobiles.Each vehicle includes one water pump,which is currently made in-house.Details of the water pump assembly are as follows: $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 1300 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 10.50 & \text { per unit } \
\hline \text { Fixed costs } & \$ 10,000 & \text { per month } \
\hline
\end{array}$$ An Indonesian factory has offered to supply Cheong Automobile Company with ready-made units for a cost of $15 for each water pump.Assume that Cheong's fixed costs are unavoidable and that Cheong will not be able to use the excess capacity in any profitable manner.If Cheong decides to outsource,monthly operating income will ________.

Quizplus · Accepted Answer

If Cheong decides to outsource, they will save $10 per unit ($25 - $15). If they produce 585 units in a month, they will save $5850 ($10 x 585). However, if they outsource and buy ready-made units, they will not be able to cover their fixed costs of $41650. So, their monthly operating income will decrease by $5850 ($0 - $5850). Therefore, the correct answer is option D.

Cheong Automobile Company Fabricates Automobiles An Indonesian Factory Has Offered to Supply Cheong Automobile Company