Dong Fang 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:
$$\begin{array} { | l | l | l | }
\hline \text { Volume } & 700 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 6 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000 & \text { per month } \
\hline
\end{array}$$
A factory in Indonesia has offered to supply Dong Fang with ready-made units for a price of $15 each.
Assume that Dong Fang's fixed costs could be reduced by $5000 if they outsource and that Dong Fang will not be able to use the excess capacity in any profitable manner.What will be the impact on Dong Fang's monthly operating profit if Dong Fang decides to outsource?

Question

Dong Fang 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:
$$\begin{array} { | l | l | l | } 
\hline \text { Volume } & 700 & \text { units per month } \
\hline \text { Variable cost per unit } & \$ 6 & \text { per unit } \
\hline \text { Fixed costs } & \$ 14,000 & \text { per month } \
\hline
\end{array}$$
A factory in Indonesia has offered to supply Dong Fang with ready-made units for a price of $15 each.
Assume that Dong Fang's fixed costs could be reduced by $5000 if they outsource and that Dong Fang will not be able to use the excess capacity in any profitable manner.What will be the impact on Dong Fang's monthly operating profit if Dong Fang decides to outsource?

Quizplus · Accepted Answer

The cost of making in-house is $18,200 ($6 variable cost * 700 units + $14,000 fixed costs). Outsourcing costs $10,500 ($15 * 700 units) and reduces fixed costs by $5,000, totaling $15,500. The difference is $2,700, so profit decreases by $2,700 - $1,400 (fixed cost savings) = $1,300.

Dong Fang Company Fabricates Inexpensive Cars for Sale to Third