A company produces 400 microwave ovens per month,each of which includes one electrical circuit.The company currently manufactures circuit in-house but is considering outsourcing the circuits at a contract price of $30 each.Currently,the cost of producing circuits in-house includes variable costs of $24 per circuit and fixed costs of $6000 per month.
Assume the company could cut fixed costs in half 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

Currently, the company's total cost for producing circuits in-house is:
Fixed cost + (Variable cost x Quantity)
= $6000 + ($24 x 400)
= $15000

If the company outsources the circuits, the new total cost will be:
Lowered Fixed cost + (Contract price x Quantity)
= $3000 + ($30 x 400)
= $15000

We can see that with outsourcing, the company's total cost remains the same, but the fixed cost is lowered by half. Therefore, the operating profit will increase by the amount of fixed cost saved, which is $3000.

Hence, the correct choice is D, i.e. operating profit will go up by $600.

A Company Produces 400 Microwave Ovens Per Month,each of Which