Fin Company fabricates inexpensive cars for sale to Third World countries.Each car includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
$$\begin{array} { | l | l | l | }
\hline \text { Volume } & 1200 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 10.50 & \text { per unit } \
\hline \text { Fixed costs } & \$ 15,000 & \text { per month } \
\hline
\end{array}$$
A factory in Indonesia has offered to supply Fin Company with ready-made units for a price of $17 each.
Assume that Fin's fixed costs are unavoidable and that Fin will not be able to use the excess capacity in any profitable manner.What will be the impact on Fin's monthly operating profit if Fin decides to outsource?

Question

Fin Company fabricates inexpensive cars for sale to Third World countries.Each car includes one wiring harness,which is currently made in-house.Details of the harness fabrication are as follows:
$$\begin{array} { | l | l | l | } 
\hline \text { Volume } & 1200 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 10.50 & \text { per unit } \
\hline \text { Fixed costs } & \$ 15,000 & \text { per month } \
\hline
\end{array}$$
A factory in Indonesia has offered to supply Fin Company with ready-made units for a price of $17 each.
Assume that Fin's fixed costs are unavoidable and that Fin will not be able to use the excess capacity in any profitable manner.What will be the impact on Fin's monthly operating profit if Fin decides to outsource?

Quizplus · Accepted Answer

We need to calculate the change in operating profit if Fin decides to outsource.

Current cost of producing one wiring harness in-house = $32

Cost of outsourcing one wiring harness = $17

Thus, if Fin decides to outsource, it will save $15 per wiring harness.

Number of wiring harnesses produced by Fin per month = 5000

Current total cost of producing wiring harnesses in-house = 5000*$32 = $160,000

New total cost of producing wiring harnesses after outsourcing = 5000*$17 = $85,000

Change in monthly operating profit = Current total revenue - Current total cost - New total cost

Assuming that the revenue generated from selling the cars will remain constant, the change in monthly operating profit will be:

= 0 - (5000*$32) + (5000*$17)

= -$80,000 + $85,000

= $5,000

Thus, if Fin decides to outsource, its monthly operating profit will decrease by $5,000. Therefore, the correct choice is C.

Fin Company Fabricates Inexpensive Cars for Sale to Third World