Walsh Automobile Company fabricates automobiles.Each vehicle includes one airflow sensor,which is currently made in-house.Details of the airflow sensor fabrication are as follows: $$\begin{array} { | l | r | l | }
\hline \text { Volume } & 700 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000 & \text { per month } \
\hline
\end{array}$$ A Japanese factory has offered to supply Walsh with ready-made units for a cost of $15 per sensor.Assume that Walsh's fixed costs could be reduced by $3000 if it outsources and that Walsh will not be able to use the excess capacity in any profitable manner.If Walsh decides to outsource,monthly operating income will ________.

Question

Walsh Automobile Company fabricates automobiles.Each vehicle includes one airflow sensor,which is currently made in-house.Details of the airflow sensor fabrication are as follows: $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 700 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \
\hline \text { Fixed costs } & \$ 13,000 & \text { per month } \
\hline
\end{array}$$ A Japanese factory has offered to supply Walsh with ready-made units for a cost of $15 per sensor.Assume that Walsh's fixed costs could be reduced by $3000 if it outsources and that Walsh will not be able to use the excess capacity in any profitable manner.If Walsh decides to outsource,monthly operating income will ________.

Quizplus · Accepted Answer

The current monthly cost of producing the sensors in-house is the sum of variable costs and fixed costs: (700 units * $8/unit) + $13,000 = $5,600 + $13,000 = $18,600. If Walsh outsources, the cost will be 700 units * $15/unit = $10,500, but with a reduction in fixed costs by $3,000, the new fixed costs would be $10,000. So, the total cost after outsourcing would be $10,500 + $10,000 = $20,500. The increase in monthly operating costs by outsourcing would be $20,500 - $18,600 = $1,900, hence a decrease in monthly operating income by $1,900.

Walsh Automobile Company Fabricates Automobiles A Japanese Factory Has Offered to Supply Walsh with Ready-Made