Fastec Automobile Company fabricates automobiles.Each vehicle includes one transfer case,which is currently made in-house.Details of the transfer case fabrication are as follows: $$\begin{array} { | l | r | l | }
\hline \text { Volume } & 800 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \
\hline \text { Fixed costs } & \$ 15,000 & \text { per month } \
\hline
\end{array}$$ A Korean factory has offered to supply Fastec with ready-made units for a price of $14 per transfer case.Assume that Fastec's fixed costs are unavoidable,but that Fastec could use the vacated production facilities to earn an additional $9500 of profit per month.If Fastec decides to outsource,monthly operating income will ________.

Question

Fastec Automobile Company fabricates automobiles.Each vehicle includes one transfer case,which is currently made in-house.Details of the transfer case fabrication are as follows: $$\begin{array} { | l | r | l | } 
\hline \text { Volume } & 800 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 8 & \text { per unit } \
\hline \text { Fixed costs } & \$ 15,000 & \text { per month } \
\hline
\end{array}$$ A Korean factory has offered to supply Fastec with ready-made units for a price of $14 per transfer case.Assume that Fastec's fixed costs are unavoidable,but that Fastec could use the vacated production facilities to earn an additional $9500 of profit per month.If Fastec decides to outsource,monthly operating income will ________.

Quizplus · Accepted Answer

Explanation: Current in-house production cost per month = (800 units * $8 variable cost per unit) + $15,000 fixed costs = $6,400 + $15,000 = $21,400.Cost if outsourced = 800 units * $14 = $11,200.Savings from outsourcing = $21,400 - $11,200 = $10,200.Additional profit from using vacated facilities = $9,500.Total increase in monthly operating income if outsourced = $10,200 (savings) + $9,500 (additional profit) = $19,700.However, since the fixed costs of $15,000 are unavoidable, we only consider the variable cost savings and the additional profit. Therefore, the net increase = $9,500 (additional profit) + ($10,200 - $15,000) (net savings after considering unavoidable fixed costs) = $9,500 - $4,800 = $4,700.

Fastec Automobile Company Fabricates Automobiles A Korean Factory Has Offered to Supply Fastec with Ready-Made