A company produces 400 microwave ovens per month,each of which includes one electrical circuit.The company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract cost of $28 each.Currently,the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5000 per month.Assume the company could not reduce any fixed costs by outsourcing and that there is no alternative use for the facilities presently being used to make circuits.If the company outsources,operating income will ________.

Question

Quizplus · Accepted Answer

The current cost of producing circuits in-house is the sum of variable costs ($26 per circuit) and fixed costs ($5000 per month). For 400 circuits, the total variable cost is 400 * $26 = $10,400. Adding the fixed costs, the total in-house production cost is $10,400 + $5000 = $15,400. If outsourced at $28 each, the cost for 400 circuits is 400 * $28 = $11,200. The difference in costs is $15,400 (in-house) - $11,200 (outsourced) = $4,200, not accounting for the fixed costs that remain regardless of the decision. Since fixed costs remain unchanged, comparing only variable and outsourcing costs shows outsourcing increases costs by $800 ($11,200 - $10,400), thus operating income decreases by $800.

A Company Produces 400 Microwave Ovens Per Month,each of Which