Lightning Semiconductors produces 100,000 hi-tech computer chips per month.Each chip uses a component which Lightning makes in-house.The variable costs to make the component are $1.40 per unit and the fixed costs run at $1,100,000 per month.The company has been approached by a foreign producer who can supply the component,ready-made and with acceptable quality standards for $1.20 each.The fixed costs are unavoidable and Lightning would have no other use for the facilities currently employed in making the component.What is the effect on operating profit if the company decides to outsource?

Question

Quizplus · Accepted Answer

If Lightning Semiconductors decides to outsource the component, they would save $0.20 per unit, which translates to $20,000 per month (100,000 units x $0.20 saved per unit). Therefore, operating profit would increase by $20,000 per month.

Lightning Semiconductors Produces 100,000 Hi-Tech Computer Chips Per Month