Comfort Cruiser Company manufactures 100 luxury yachts per month.Included in each yacht is a compact media center.Comfort Cruiser manufactures the media center in-house.The company is considering the possibility of outsourcing the production of the media centers in order to close down some of its facilities and reduce the administrative costs.At present,the variable cost per unit is $275,and fixed costs are $55,000 per month.Assume that if it outsources,fixed costs could be reduced by 60%.The production manager advised the company to contract with a foreign supplier who offered a contract cost of $410 per unit.If it outsources the media center,how would that affect operating income?

Question

Quizplus · Accepted Answer

If the company outsources the production of the media centers, variable costs would increase by $135 per unit ($410 - $275), and fixed costs would decrease by $33,000 (60% of $55,000). The net effect on operating income would be an increase of $19,500 [(100 units x $135) - $33,000].

Comfort Cruiser Company Manufactures 100 Luxury Yachts Per Month