A company produces 300 microwave ovens per month,each of which includes one electrical circuit.The company currently manufactures the circuit in-house but is considering outsourcing the circuits at a contract price of $48 each.Currently,the cost of producing circuits in-house includes variable costs of $26 per circuit and fixed costs of $5000 per month.
Assume the company could not reduce any fixed costs by outsourcing and that there is no alternative use for the facilities presently being used to make circuits.How will it affect monthly operating profit if the company outsources?

Question

Quizplus · Accepted Answer

The variable cost of producing 300 circuits in-house is $26 * 300 = $7800. The fixed cost is $5000. The total cost of producing the circuits in-house is $7800 + $5000 = $12800. The cost of outsourcing the circuits is $48 * 300 = $14400. The difference between the cost of producing the circuits in-house and the cost of outsourcing the circuits is $14400 - $12800 = $1600. The operating profit will go down by $1600.

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