A company produces 300 microwave ovens per month,each of which includes one electrical circuit.The company currently manufactures the circuits in-house but is considering outsourcing the circuits at a contract cost of $30 each.Currently,the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $6000 per month.Assume the fixed costs are unavoidable but that company could employ the vacated premises to earn rental income of $2600 per month.If the company outsources,monthly operating income will ________.

Question

Quizplus · Accepted Answer

If the company outsources, it will pay $30 per circuit for 300 circuits, totaling $9,000. Currently, it spends $26 per circuit for 300 circuits, totaling $7,800, plus fixed costs of $6,000, totaling $13,800. By outsourcing, it avoids the $7,800 variable cost but incurs the $9,000 outsourcing cost. The difference in costs is $1,200 ($9,000 - $7,800), but it can also earn $2,600 in rental income. The net change in operating income is $1,400 increase ($2,600 rental income - $1,200 additional outsourcing cost).

A Company Produces 300 Microwave Ovens Per Month,each of Which